Critical mass and campaign success: a behavioral model of reward based crowdfunding (JMP2)

Abstract

We set out to solve the bimodal puzzle regarding campaigns’ outcomes in reward-based crowdfunding: Most campaigns either fail with little fund raised or succeed by a small margin. The proposed analytical model consists of a sophisticated entrepreneur and boundedly rational buyers whose decisions are based on a meaningful behavior rule associated with network externalities and time effects. Buyers are assumed to bear hassle costs for pledging and thus only pledge when the campaign has progressed well by their arrival time. The model suggests that the campaign’s success hinges on reaching a critical mass at an early stage, with the bimodal funding outcomes neatly predicted by the closed-form solution. The model also yields herding dynamics which is argued to be (bounded) rational and efficient. Rich economic and managerial implications about the best timing to utilize the social network, the caveats in designing discriminatory prices, the (stricter) quality requirement due to buyers’ pledging failure risk for campaigns to succeed in crowdfunding, and on targeted marketing, campaign monitoring, re-campaigning decision… are drawn from the model, giving sights for the entrepreneur to better steer strategy and achieve success in crowdfunding.