Ajay Agrawal, Christian Catalini, Avi Goldfarb

Bibliographic Information

Chapter in NBER book Innovation Policy and the Economy, Volume 14 (2014), Josh Lerner and Scott Stern, editors (p. 63 - 97)
Conference held April 23, 2013
Published in June 2014 by University of Chicago Press
© 2014 by the National Bureau of Economic Research
in NBER Book Series Innovation Policy and the Economy

This chapter first appeared as NBER working paper w19133, Some Simple Economics of Crowdfunding, Ajay K. Agrawal, Christian Catalini, Avi Goldfarb

This paper was revised on July 27, 2016

Available Formats


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.

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