Controlling information asymmetry in equity crowdfunding

Abstract

Abstract. Crowdfunding is a fast developing method of projects finance mobilization. However, weakness of trust and the associated problem of information asymmetry constrain risk sharing investments as well as equity crowdfunding. Reputation mechanism is one of the newest ways to address asymmetric information issue in web-based social networks. A reputational mechanism has been designed and named “Fame” in this paper specifically for equity crowdfunding systems to eliminate moral hazard and reduce asymmetric information. The term “Fame” is meant to capture the qualitative aspects of reputation such as trustworthiness, credibility, reliability of every individual member of an equity crowdfunding system. Fame is systematic, countable and computable (implicit and explicit) reputation monitoring mechanism. A game theory approach is employed using two different games: “without Fame” and “with Fame” games, to show that a “with Fame” crowdfunding game leads to better results. Moreover, net aggregate surplus in “with Fame” crowdfunding is larger than “without Fame” crowdfunding system. 

Keywords. Crowdfunding, Equity crowdfunding, Reputation mechanism, Mechanism of fame, Information asymmetry, Risk sharing.

JEL. C70, D82, D85, D91, G23.