Post by Sapphire Capital on Oct 15, 2013 0:47:35 GMT 4
Adverse Incentives in Crowdfunding
Thomas Hildebrand
E.CA Economics
Manju Puri
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
Jörg Rocholl
ESMT European School of Management and Technology
April 23, 2013
Abstract:
This paper analyses the substantially growing markets for crowdfunding, in which lenders give money to borrowers without financial intermediation. Critics suggest these markets allow sophisticated investors to take advantage of unsophisticated investors. The growth and viability of these markets critically depends on the underlying incentives. We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market. In particular we look at group leader bids in the presence of origination fees and find that these bids are wrongly perceived as a signal of good loan quality, resulting in lower interest rates. Yet these loans actually have higher default rates. These adverse incentives are overcome only with sufficient skin in the game and when there are no origination fees. The results provide important implications for crowdfunding, its structure and regulation.
Number of Pages in PDF File: 43 source: papers.ssrn.com/sol3/papers.cfm?abstract_id=1615483
