Crowdfunding mechanism comparison when product quality is uncertain

Abstract

Abstract Many entrepreneurs have recently employed crowdfunding to raise money. Although there are several crowdfunding mechanisms, there is no clear dominant strategy for the type of mechanisms that should be adopted by the entrepreneur. This paper compares two commonly used mechanisms of crowdfunding by building a two‐person and two‐period model where the entrepreneur first makes the decision then two consumers follow. The all‐or‐nothing ( ) mechanism allows entrepreneurs to set a funding target and keep nothing unless the goal is achieved. In contrast, entrepreneurs under the keep‐it‐all ( ) mechanism must also set a target and keep any funds regardless of whether the goal has been achieved. To compare these two mechanisms, we assume that customers are not sure about the quality of the product, which is very common in reward‐based crowdfunding. Using a unified model, our results show that large or poorly scalable projects are more likely to choose the mechanism.