Crowdfunding for Innovation : Information Asymmetry and Deferred Payments

A major concern in rewards-based crowdfunding is the inherent asymmetric information between the entrepreneur and backers, which impacts both the financing and product innovation. To address the issue of information asymmetry, crowdfunding platforms have introduced a deferred payment mechanism, whereby the platform retains a small percentage of a campaign's funds raised after the successful campaign. The funds held are released to the entrepreneur only if the promised product is developed for backers. We develop a stylized game-theoretic model that captures the impacts of deferred payments on the entrepreneur's product innovation decision. Our results demonstrate that developing innovative products is a desirable option for entrepreneurs only when the products are sufficiently profitable in the aftermarket. Implementing proportional-based deferred payments does not always promote product innovation. While proportional-based deferred payments can lower the signaling cost, they bring more financial pressure to entrepreneurs, which can amplify the negative impact of upgrading costs on the entrepreneur’s motivation to innovate. Crowdfunding platforms can motivate entrepreneurs to manufacture innovative products by setting an appropriate reserved percentage. Furthermore, target-based deferred payments can always encourage entrepreneurs to produce innovative products since they can reduce the signaling cost without increasing the entrepreneur's financing pressure. Our findings suggest how entrepreneurs might undertake product innovation decisions in light of information asymmetry, as well as how crowdfunding platforms can design deferred payments to boost product innovation