Profit Sharing: A Contracting Solution to Harness the Wisdom of the Crowd

Abstract

When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project payoff? A typical common stock contract rewards investors in proportion to their initial investment, but does it make the best use of investors' crowd wisdom? By illustrating how a simple profit-sharing contract with decentralized decision making could often coordinate individuals' investment choices, this paper studies as a general contracting problem the role of profit sharing in harnessing the "wisdom of the crowd", and discusses specific implications for FinTech applications such as the security design of investment crowdfunding.

Keywords: contract theory, crowdfunding, financial innovation, FinTech, information economics, investment, security design, wisdom of the crowd

JEL Classification: C72, D53, D82, D86, G23