Adverse incentives in crowdfunding

Journal Article (Journal Article)

This paper analyzes the substantially growing markets for crowdfunding, in which retail investors lend to borrowers without financial intermediaries. Critics suggest that these markets allow sophisticated investors to take advantage of unsophisticated investors. The growth and viability of these markets critically depend on the underlying incentives. We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market. In particular, we look at group leader bids in the presence of origination fees and find that these bids are (wrongly) perceived as a signal of good loan quality, resulting in lower interest rates. Yet these loans actually have higher default rates. These adverse incentives are overcome only with sufficient skin in the game and when there are no origination fees. The results from the analysis in this paper provide more general implications for crowdfunding, its structure, and its regulation.

Full Text

Duke Authors

Cited Authors

  • Hildebrand, T; Puri, M; Rocholl, J

Published Date

  • March 1, 2017

Published In

Volume / Issue

  • 63 / 3

Start / End Page

  • 587 - 608

Electronic International Standard Serial Number (EISSN)

  • 1526-5501

International Standard Serial Number (ISSN)

  • 0025-1909

Digital Object Identifier (DOI)

  • 10.1287/mnsc.2015.2339

Citation Source

  • Scopus