More and more, crowdfunding platforms like Kickstarter are used by micro-entrepreneurs to get project funding. Financial contributions from local communities can be especially valuable. In fact, funders have an intrinsic affinity for initiatives in their community. But the downside is that this impedes projects from getting investors beyond their region to finance them.
In “Financing Micro-Entrepreneurship in Online Crowdfunding Markets: What Drives Local Bias,” Fangzhu Yang and her co-authors explore local bias, which is the “greater likelihood of investors contributing to geographically closer projects, in online crowdfunding markets.” The authors consider two channels that may influence this. One is a preference channel, “which captures investors’ inherent, non-monetary attachment to local projects,” such as their sense of social identity or a wish to give to their communities. Another is an information channel, which “reflects funders’ informational advantage when evaluating local projects,” such as improved comprehension of an initiative’s context or environmental familiarity. The authors draw their data from a reward-based Chinese crowdfunding platform.
Next, Dr. Yang and her co-authors approximate a structural model to examine and quantify how this bias is spurred by information and preference channels. They untwine the influences of preference and information by creating a novel empirical strategy, which involves sorting projects as location-related (LR) or non-location-related. Other employed techniques include regression analysis, text-mining, and counterfactual experiments.
Ultimately, this paper demonstrates the influence of platform design on investors and project funding access. The authors conclude that in this particular crowdfunding platform, investors are notably more likely to support local projects, with two-thirds of the effect accounted by informational frictions. They also determine that LR projects have a much greater local bias. Finally, removing location information heightens the quantity of different-province investors and their mean investment (although it does discourage funders from the same region). This policy could expand investor engagement and support initiatives from less developed areas.
Read the article here.
