ccaf-2021-conference-paper-cong-xiao
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ccaf-2021-conference-paper-cong-xiao
Information Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao onomic activities such as crowdfunding often involve sequential interactions, oliscrvational learning, and project implementation contingent on achieving certain thresholds of sup|M>rl. We incorporate endogenous all-or-nothing thresholds in a classic model of information cascade. Wo find that, early ccaf-2021-conference-paper-cong-xiao supjjorters tap the wisdom of a later “gate-keeper’* and effectively delegate their decisions, leading to uni-directional cascades and preventing ageccaf-2021-conference-paper-cong-xiao
nts' herding on rejections. Consequently, entrepreneurs or project proposers can charge supporters higher fees, and proposal feasibility, project seleInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao crowd size, and in the limit, efficient project implementation and full information aggregation ensue. Our findings arc robust to introducing contribution and information acquisition costs, thresholds based on dollar amounts, or select ion of alternative equilibria..TEL Classification: D81, D83. G1 ccaf-2021-conference-paper-cong-xiao 2, G14, L26Keywords: All-or-nothing, Entrepreneurship. Information Aggregation, Marketplace Lending, Vent tire Financing.‘The autliors are especiallyccaf-2021-conference-paper-cong-xiao
grateful to Philip Bond and John Kuong for helpful discussions and feedback, as well as to Ehsan Azarmaa and Siguang l.i for detailed comments and excInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao Groan, Doekstia Gupta, Valentin Haddad, Jungxuk Han. Bon Kanicl. Steve Kaplan. Mariana Khapko. Anzhela Knyazeva, Tingjun Liu. Stefano Lovo. Scott Kominers, John Nash, Dmitry Orlov, Lubots Pastor, Guillaume Rogers, Katrln Tinn, Mark Wttttcrfk'ld, Ting Xu. and seminar and conference participants at th ccaf-2021-conference-paper-cong-xiao e Adam Smith Asset Pricing Workshop. AEA Annual Meeting (Atlanta). American Finance Association Annual Mooting, Bergen FinToch Conference, Chicago Booccaf-2021-conference-paper-cong-xiao
th. China International Conference In Finance, Chicago Financial Institutions (kinfcrence. CUNY Baruch, EFA (Warsaw). 2nd Emerging Trends in EntreprenInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao Group Meeting at CMU Tepper. FIRN Sydney Market Microstructure Meeting, Fins (Barcelona), Midwest Finance Conference. MlnnesMa Carlson Junior Finance Conference, RSFAS Summer Camp, SFS Finance Cavalcade, Stanford SITE Summer Workshop. Summer Institute of Finance, UBC Summer Conference. University o ccaf-2021-conference-paper-cong-xiao f Illinois at Chicago. University of Illinois at Chicago. University of Melbourne. University of New South Wales. University of Technology Sydney Busiccaf-2021-conference-paper-cong-xiao
ncsa School. University of Washington Foster School, Western Finance Association Annual Meeting, and 1st World Symposium on Investment Research for diInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao earch funding. Thia I>aper subsumes contents from previous manuscripts titled “Up-cascaded Wisdom of the Crowd" and "Information Cascades and Threshold Implementation." The contents of this article arc solely the responsibility of the authors.:(k>rnell University Johnson Graduate School of Managemen ccaf-2021-conference-paper-cong-xiao t. Email: wiil.congticorncll.edu$Tho Chinese University of Hong Kong. Email: ytzhouGcuhk.cxiu.hk1 IntroductionFinancing activities and business procesccaf-2021-conference-paper-cong-xiao
ses for support-gat hol ing often involve sequential contributors, observational learning, and project, implementation contingent on achieving certainInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao itutes arguably the most salient example.1 Such economic interactions with sequential actions from privately informed agents are prone to information cascades that create incomplete information aggregation and suboptimal financing. Standard models (e.g., Banerjee, 1992; Bikhchandani, Hirshleifer. an ccaf-2021-conference-paper-cong-xiao d Welch, 1992) focus on the case of pure informational externalities with each agent’s payoff structure independent of others’ actions. We incorporateccaf-2021-conference-paper-cong-xiao
into a model of dynamic contribution game the fact that many projects or proposals are only implemented with a sufficient level of support an “all-orInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao ations for financing projects and aggregat ing informat ion, the two most important functions of modern financial markets.2We find that early supporters tap the wisdom of a later “gate-keeper’' ami effectively delegate their contribution decisions, leading to uni-directional cascades. As the first d ccaf-2021-conference-paper-cong-xiao ynamic model of crowdfunding incorporat ing observational learning and AoN t hresholds, our theory‘Since its inception in the arts and creativity-baseccaf-2021-conference-paper-cong-xiao
d industries (e.g., recorded music, film, video games), crowdfunding has quickly IxMxmie a mainstream source of capital for entrepreneurs, partially fInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao a few years, its total volume has reached a whopping 35 billion USD globally in 2017. It has surpassed the market size for angel funds in 2015, and the World Bank Report estimates that global investment through crowdfunding will reach $93 billion in 2025 (www.infodcv.org/infodev — fứejỉ/wbrrowdfundi ccaf-2021-conference-paper-cong-xiao ngreporl-vi2.pdf). Statista similarly projects a compound annual growth rate of 14.7% for the next four years (www.nlalisla.comỊoìMook/23ĩ>Ịcrowdfundiccaf-2021-conference-paper-cong-xiao
ng/worldwidemarkel — revenue). One well-known market leader. Kickstarter, lias helped fund almost 200,000 campaigns, raising over 5.6 billion dollars Information Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao ness Startups (JOBS) Act in April 2012, whose Tit le III legalized crowdfunding for equity by relaxing various requirements concerning the sale of securit ies in May 2016. What is more, with the rise of initial coin offerings, corporate crowdfunding using tokens is liecoming a new norm, with over te ccaf-2021-conference-paper-cong-xiao n billion USD raised in the United States alone in 2017 and 2018 and t he market cap for tokens exceeding 1.5 trillion USD at t he dawn of 2021 (Congccaf-2021-conference-paper-cong-xiao
and Xiao. 2020; Cong, Li, Tang, and Yang, 2020). All these took place against the backdrop of a thriving P2P lending market glolxally of a capitalizatInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao ority rule or q-rule is a common practice in many voting procedures; assurance contract or crowdaction in public goods provision is also characterized by sequential decisions ami implementation thresholds (e.g., Bagnoli and Lipman. 1989); charitable projects need a minimum level of funding-raised to ccaf-2021-conference-paper-cong-xiao proceed (e.g., Andreoni, 1998).1constitutes an initial step in understanding crowdfunding dynamics and other sequential contribution games, especiallccaf-2021-conference-paper-cong-xiao
y concerning how threshold implementation and large crowds can improve proposal feasibility, project selection, and information aggregation. We also cInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao ion cascades and that project implementation and information aggregation are crowd-size dependent and can achieve full efficiency in the large-market limit, results hitherto unobtainable in the literature.Specifically, wo introduce threshold implementation in a standard framework of information casc ccaf-2021-conference-paper-cong-xiao ade à la Bikhchandani. llirshleifer, and Welch (1992). allowing potentially en dogenous AoN thresholds and pricing. A project proposer sequent tally accaf-2021-conference-paper-cong-xiao
pproaches A agents who choose to support or reject the project. Each supporter pays a pre determined price, and then gets a payoff normalized to one iInformation Cascades and Threshold Implementation: An Application to Crowdfunding*Lin William Cong'Yizhon Xiao§Current Draft: February 2021AbstractEco ccaf-2021-conference-paper-cong-xiao and observe the actions of preceding agents, before deciding whether to make a contribution/support. Deviating from the literature, supporters only pay the price and receive the project payoff if the number of supporters reaches an AoN threshold, potentially pre-specified by the proposer.AoN thresh ccaf-2021-conference-paper-cong-xiao olds lead to uni-directional cascades ill which agents never rationally ignore positive private signals to reject the project (DOWN cascade), but mayccaf-2021-conference-paper-cong-xiao
rationally ignore negative private signals to support the project (UP cascade). Information aggregation (and its costly production) also become more eGọi ngay
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