It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized since these types of funding decisions are usually predicated on personal relationships and due diligence requiring face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding - raising capital from many people through an online platform - which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the U.S., we provide a preliminary exploration of its underlying economics. We highlight the extent to which economic theory, in particular transaction costs, reputation, and market design, can explain the rise of non-equity crowdfunding and offer a framework for speculating on how equity-based crowdfunding may unfold. We conclude by articulating open questions related to how crowdfunding may affect social welfare and the rate and direction of innovation.

Innovation Policy and the Economy 2013

University of Chicago Press

Agrawal, Ajay K., Catalini, Christian, and Goldfarb, Avi. "Some Simple Economics of Crowdfunding." Innovation Policy and the Economy 2013, ed. Josh Lerner and Scott Stern, Univeristy of Chicago Press, 2014, 1-47. © 2014 National Bureau of Economic Research Innovation Policy and the Economy

Version:Author's final manuscript

9780226158563