Crowdfunding websites are increasingly being used as a mechanism to fund the provision of public goods. Crowdfunding is the practice of raising capital from many investors to fund a project through an on-line platform. It is a relatively new mechanism, with well-known platforms such as FundRazr, GoFundMe, Kickstarter, and IndieGoGo having been launched only in the late 2000s.
The crowdfunding of public goods, sometimes called ‘civic crowdfunding’ has found its niche on these general platforms but also on specialized websites such as Citizinvestor, IOBY, JustGiving, and GlobalGiving. Examples of civic crowdfunding are projects related to education and infrastructure, but also green projects that aim at protecting environmental quality and conserving wildlife.
Crowdfunding may overcome some obstacles that are normally associated with the provisioning of public goods but others remain. Two of these are free-riding and coordination problems. There is no need for me to contribute to funding a public good if others do so, and the sheer number of projects on crowdfunding platforms may result in projects not reaching their funding threshold just because they are overlooked or because other projects are receiving more attention.
In an experimental setting we have tested the impact of various crowdfunding designs on free-riding and coordination problems. We have done so using our own experimental crowdfunding platform to which participants could log in and contribute to abstract projects, similar to real-world crowdfunding platforms. The advantage of our experimental platform was that we could test the impact of various designs on contribution behavior. Among others we tested the impact of seed money and the presence of seemingly irrelevant projects.
Increase early contributions
Our results show that such design tweaks may help to overcome free-riding and coordination problems but only if they increase early contributions. Such early contributions serve as a signal to all participants that they should focus on that particular project so that less money is wasted on projects that will not eventually reach their funding threshold.
In order to verify results in a more realistic setting, we conducted a follow-up experiment in cooperation with the Dutch Society for Nature Conservation (Natuurmonumenten). Replacing our abstract projects by actual Natuurmonumenten projects to which participants could contribute revealed similar patterns of funding behavior. Combined, these results point out critical success factors in the design of civic crowdfunding in order to improve coordination and mitigate free-riding. They also give support for crowdfunding as a promising mechanism for the private provision of public goods.
This blog is based on: Ansink, E., M. Koetse, J. Bouma, D. Hauck, D. van Soest (2018), Crowdfunding public goods: An experiment, Tinbergen Institute Discussion Paper 17/119.