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Fraud tolerance in optimal crowdfunding

AuthorsEllman, Matthew CSIC ORCID ; Hurkens, Sjaak CSIC ORCID
Mechanism design
Moral hazard
Private information
Issue DateApr-2019
CitationEconomics Letters 181: 11-16 (2019)
AbstractReward-based crowdfunding enables credit-constrained entrepreneurs to raise money to develop and create innovative products. Crowdfunders' low monitoring incentives open the door to fraud. In practice, fraud is surprisingly rare. Strausz (2017) proves that crowdfunding implements the optimal ex post individually ratio- nal mechanism design outcome in an environment with entrepreneurial moral hazard and private cost information. However, ex post individual rationality precludes all crowdfunding unless fraud can be prevented with certainty. Actual crowdfunding tolerates some fraud. We show this (i) generates strictly higher pro ts and welfare, but (ii) cannot implement the optimal ex interim individually rational outcome.
Publisher version (URL)https://doi.org/10.1016/j.econlet.2019.04.015
Appears in Collections:(IAE) Artículos
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