Paper detail

How does Observational Learning Impact Crowdfunding Outcomes for Backers, Project Creators and Platforms?

Reward-based crowdfunding platforms are becoming increasingly popular to finance projects proposing innovative products, e.g., Kickstarter. One important challenge of this form of financing is the uncertainty in the quality of projects. To mitigate the negative effects of this uncertainty for backers, platforms share information regarding the decisions of earlier backers visiting the project campaign pages. This allows backers not only to rely on their expertise to identify project qualities but also to learn from the decisions of their fellow backers who might be more informed. Current studies on observational learning (OL) in crowdfunding mainly focus on predicting the success chances of projects, and there is a lack of understanding of how OL affects crowdfunding dynamics for backers, project creators and platforms. This paper aims to fill this gap by using a theoretical OL model involving two projects competing for funding from backers who may have differentiated expertness in identifying project quality. By introducing various performance measures for backers, creators and platforms and comparing these measures under OL to the case without learning, we provide a thorough analysis of how OL impacts crowdfunding outcomes. We find that information sharing and OL always benefit backers, especially when the early backers are experts. Regarding the impact of OL on creators and platforms, our analysis reveals two understudied but important aspects: the tightness of the competition for projects according to the availability of funding, and the quality difference among the proposed projects. Additionally, we investigate how OL affects the quality decisions of creators and show that OL increases the incentive for high-quality products, especially in situations where funding is scarce.