How Does the Rule to Promote Campaigns by a Crowdfunding Platform Affect Target Setting and Sharing of Campaign's Revenues?

We investigate strategies a reward-based crowdfunding platform employs to align an entrepreneur’s choice of pledge and target levels with its own preferences. We consider two instruments the platform can employ: the way it chooses to promote campaigns to potential backers, and its share of the campaign revenues. Kickstarter, for instance, promotes a select set of campaigns by compiling a list of projects on its “recommended list.” We find that in choosing its promotion and sharing rule the platform exposes entrepreneurs to the risk of not generating sufficient funds to start production. Only when the damage to the platform’s reputation, in case the entrepreneur fails to fulfil her obligations, is sufficiently high, does the platform’s promotion and sharing rules strategies ensure that any promoted campaign will have sufficient funds to start production. The strategies utilized by the platform are more likely to ensure production when backers are more altruistic, when the development cost is lower, or when the entrepreneur has minimal liability and reputational cost in case production fails. In such instances, the entrepreneur is motivated to set a low target, which increases the likelihood that the funds raised are insufficient to start production despite raising enough to meet the campaign’s target. The platform’s choice of promotion and sharing rule is intended to rectify such misalignments on the part of the entrepreneur