Crowdfunding: Tapping the right crowd

With crowdfunding, an entrepreneur raises external financing from a large audience (the “crowd”), in which each individual provides a very small amount, instead of soliciting a small group of sophisticated investors. This article compares two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity). In either case, we assume that “crowdfunders” enjoy “community benefits” that increase their utility. Using a unified model, we show that the entrepreneur prefers pre-ordering if the initial capital requirement is relatively small compared with market size and prefers profit sharing otherwise. Our conclusions have implications for managerial decisions in the early development stage of firms, when the entrepreneur needs to build a community of individuals with whom he or she must interact. We also offer extensions on the impact of quality uncertainty and information asymmetry.     

A theory of reciprocity

People are reciprocal if they reward kind actions and punish unkind ones. In this paper we present a formal theory of reciprocity. It takes into account that people evaluate the kindness of an action not only by its consequences but also by its underlying intention. The theory is in line with the relevant stylized facts of a wide range of experimental games, such as the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoner's dilemma, and public goods games. Furthermore, it predicts that identical consequences trigger different reciprocal responses in different environments. Finally, the theory explains why outcomes tend to be fair in bilateral interactions whereas extremely unfair distributions may arise in competitive markets.     

A theoretical analysis of optimal financing strategies for different types of capital-constrained entrepreneurs

In this paper, we compare two alternative financing strategies that capital-constrained entrepreneurs can adopt: they can either wait until they raised enough money to complete their project (the more conservative strategy) or use limited resources to achieve some intermediate milestone before contacting large outside investors such as venture capitalists (the more adventurous strategy). We examine how the choice of financing strategy is affected by entrepreneurial types (life-style, serial and pure profit-maximizing entrepreneur). We show that specific entrepreneurial characteristics may ultimately affect the shape of firms as they may pursue different strategies to achieve similar goals. The paper generates a number of empirical predictions on security design, the interplay between angel and venture capital finance, and the professionalization of the venture capital market.