The step-level public good aspect of equity crowdfunding: A game-theoretic analysis

Abstract

The social significance of crowdfunding has been growing during the last few years and it has become an attractive and common way to finance different kinds of projects. In the particular case of an equity crowdfunding campaign, it implies an interesting social interaction among potential contributors (the “crowd”) since it can be conceptualized as the interaction in the private provision of a step-level public good whose rivalry and excludability are ruled by the equity principle. The present paper adopts this perspective to analyze for the first time the most basic rationale for the dynamics and results of such interaction applying a game-theoretic approach. The model assumes a two-period society in which a sufficiently high number of agents decide how much to contribute to an equity crowdfunding campaign seeking contributions to cover the investment needed by a project. If that target is relatively low, the collective behavior of the “crowd” results in an inefficient equilibrium, creating a reversed-social-dilemma among crowdfunders, the opposite of the social dilemma related to the common free-rider problem in the private provision of regular step-level public goods. If the target is not that low, the social interaction may lead to a multiplicity of equilibria, but in every possible equilibrium the amount collected by the campaign is exactly the needed investment.