Adverse Incentives in Crowdfunding

We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market

Thomas Hildebrand; Manju Puri; Jörg Rocholl

2016

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  • This paper analyzes the substantially growing markets for crowdfunding, in which retail investors lend to borrowers without financial intermediaries
  • Critics suggest that these markets allow sophisticated investors to take advantage of unsophisticated investors
  • We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market
  • We look at group leader bids in the presence of origination fees and find that these bids are perceived as a signal of good loan quality, resulting in lower interest rates
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