Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions

TLDR

Crowdfunding platforms connect artists with funders, yet local and distant funders still exhibit distinct funding patterns despite the Internet’s reduction of many distance‐related frictions. Local funders are less responsive to cumulative funding information, a distance effect largely driven by social ties that fades after the first investment, showing that online crowdfunding mitigates but does not eliminate distance‐related frictions.

Abstract

We examine a crowdfunding platform that connects artists with funders. Although the Internet reduces many distance‐related frictions, local and distant funders exhibit different funding patterns. Local funders appear less responsive to information about the cumulative funds raised by an artist. However, this distance effect appears to proxy for a social effect: it is largely explained by funders who likely have an offline social relationship with the artist (“friends and family”). Yet, this social effect does not persist past the first investment, suggesting that it may be driven by an activity like search but not monitoring. Thus, although the platform seems to diminish many distance‐sensitive costs, it does not eliminate all of them. These findings provide a deeper understanding of the abilities and limitations of online markets to facilitate transactions and convey information between buyers and sellers with varying degrees of social connectedness.