Abstract

Crowdfunding is omnipresent. The rise of the internet and the explosion of social media have made it an important source of funds for, i.a., charities, musicians and startups. Yet, it has received remarkably little attention in the economics literature. In particular, the allocation mechanisms used by crowdfunding platforms remain understudied. We make a first step towards filling this gap by studying the performance of the prevailing All-Or-Nothing mechanism(AON). We also introduce a new, strategy-proof, crowdfunding mechanism, the Generalized Moulin-Shenker mechanism (GMS). We show that in theory GMS outperforms AON in terms of equilibrium profit and funding success. We test these theoretical predictions in a laboratory, distinguishing between a sealed-bid and a dynamic version of GMS. Our results show that the dynamic GMS performs better than the sealed-bid GMS. It outperforms AON when the producer’s objective is to maximize funding success. For crowdfunding in practice, this implies that the current standard of financing projects could be improved upon by implementing a crowdfunding mechanism that is similar to the dynamic GMS.