Is Kindness the Magical Spell? The Role of Information and Reciprocity in Revenue-sharing Crowdfunding

45 Pages Posted: 25 Jun 2020

See all articles by Behrooz Pourghannad

Behrooz Pourghannad

University of Minnesota, Minneapolis, MN 55455; Mayo Clinic, Rochester, MN 55905

Guangwen Kong

Temple University-Fox School of Business

Laurens Debo

Dartmouth College - Tuck School of Business

Date Written: June 15, 2020

Abstract

We consider an entrepreneur funding his project from investors through a revenue-sharing crowdfunding campaign. The early investor (insider) has a social tie with the entrepreneur and is informed about the future revenue of the entrepreneur’s project. The investor who arrives later (outsider) is uninformed about the future revenue of the entrepreneur’s project and makes an investment after observing the insider’s investment. Thus, the insider’s investment decision may signal information regarding the entrepreneur’s future revenue to the outsider. While the outsider’s investment decision is solely financially driven, the insider has reciprocity toward the entrepreneur and considers both her own payoff as well as the entrepreneur’s payoff in making her investment decision. We investigate how reciprocity and information asymmetry play a role in the outcome of the crowdfunding campaign. We find that information asymmetry benefits both investors because the insider may invest less to signal her type, which moderates the competition between investors. In addition, reciprocity can affect the information transmission in the crowdfunding campaign. In particular, if the reciprocity is higher than a threshold, the separating equilibrium may not exist, and the insider cannot signal the future project’s revenue via distorting her investment. Moreover, when the separating equilibrium exists, the investors’ total payoff decreases as the reciprocity increases. This is because the insider invests more as the reciprocity increases, which intensifies the competition and reduces the outsider’s payoff. To respond to the insider’s increase of investment, due to the increase of reciprocity, the outsider invests less when there is no information asymmetry, but will first increase and then decreases his investment when there is information asymmetry. Our results provide guidelines for platforms and entrepreneurs on how to leverage the social network in a crowdfunding campaign.

Keywords: Crowdfunding, Entrepreneurship, Information Asymmetry, Signaling, Social Tie, Reciprocity

Suggested Citation

Pourghannad, Behrooz and Kong, Guangwen and Debo, Laurens, Is Kindness the Magical Spell? The Role of Information and Reciprocity in Revenue-sharing Crowdfunding (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3627524 or http://dx.doi.org/10.2139/ssrn.3627524

Behrooz Pourghannad (Contact Author)

University of Minnesota, Minneapolis, MN 55455 ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Mayo Clinic, Rochester, MN 55905 ( email )

200 First Street SW
Rochester, MN (507) 284-2511 55905
United States

Guangwen Kong

Temple University-Fox School of Business ( email )

531 Alter Hall
1801 Liacouras Walk
Philadephia, PA 19122
United States
19122 (Fax)

HOME PAGE: http://https://www.fox.temple.edu/about-fox/directory/guangwen-kong/

Laurens Debo

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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