The Incentive Problems with the All-or-Nothing Crowdfunding Model

This paper discusses how the all-or-nothing model can dis-incentivize crowd investors to perform due diligence over the fraud or failure risks of crowdfunding campaign. Specifically, the major upside of this model is that a project cannot be funded without a critical mass investing. If enough individual in this critical mass of crowd investors perform its due diligence to check whether projects will become successful then the model function; instead, this paper argues that this model incentivizes the crowd to produce noisy information that cannot be relied. In the all-or-nothing model, sequential investments encourages rational investors not perform due diligence because they relied on the self-interest of prior investors to perform due diligence while non-fully rational investors may rely on the belief that prior investors have better information than they might gather. Allowing campaigns to be overfunded can exacerbate some of the all-or-nothing model characteristics. This paper concludes by discussing ways within this model how the platforms, campaign creators, and crowd investors can be incentivized to better filter projects – in order to assure that crowdfunding fulfils its potential.

GABISON Garry; 

2016-06-27

University of California, Hastings College of Law

JRC98537

1554-849X,    1554-8503,   

http://journals.uchastings.edu/journals/websites/business/HBLJ_12_3.pdf,    https://publications.jrc.ec.europa.eu/repository/handle/JRC98537,