--- title: "Some Simple Economics of Crowdfunding" authors: ["Ajay Agrawal", "Christian Catalini", "Avi Goldfarb"] venue: "Innovation Policy and the Economy, University of Chicago Press" year: 2014 area: entrepreneurship featured: false links: pdf: "https://www.catalini.com/s/Some-Simple-Economics-of-Crowdfunding-dtyx.pdf" preview: "/images/papers/some-simple-economics-of-crowdfunding.png" abstract: "The framing piece for the economics of crowdfunding: which market failures these platforms solve and which they create — matching, information asymmetry, herding, fraud — and the design levers, from reputation to provision-point mechanisms, that determine whether the markets work." --- In the paper, we discuss how crowdfunding, while sometimes an effective substitute for traditional sources of capital, also introduces new distortions. The lower cost of capital, ability to cheaply assess market demand, receive feedback, and build a community of supporters, all need to be weighted against increased expropriation risk due to early disclosure, costs of managing the crowd, and absence of incentives for mentorship from professional investors. Similarly, while crowdfunding opens new investment opportunities for funders, it also exposes them to inexperienced entrepreneurs and to an environment with low incentives for due diligence. In the text we also review market design mechanisms that can mitigate these issues. [Download the paper](/s/Some-Simple-Economics-of-Crowdfunding-dtyx.pdf)