On The All-or-Nothing And Keep-it-All Mechanisms In Reward-based Crowdfunding

The SMEs play an increasingly important role in the development of the real econ-omy.For example,they help to construct an innovative country,to activate the market through the development of science and technology and to ease the employment pres-sure.In 2019,China sets up the Science and technology innovation board,which will result in an increase in the number of SMEs and improvement of their quality.However,with the increase in the number of SMEs,the financing needs from the financial market and the currency market increase as well.Usually,it is difficult for SMEs to finance and the financing costs are very high.Therefore,it is urgent to find an alternative external financing approach.With the development of technology in finance,especially in Internet Finance,crowdfunding has been accepted as a new external financing approach.Crowdfund?ing contains the characteristics of group-buying and pre-ordering.To be specific,the entrepreneurs publish their new products through crowdfunding platforms,and then,in?vestors look for interesting projects to invest through the crowdfunding platform.If the raised pledges reach the preset target,then the project is said to be successful;otherwise,the project fails.There are two common funding mechanisms in the market,i.e.,the All-or-Nothing(AON)mechanism,and the Keep-it-All(KIA)mechanism.Under the AON mechanism,the pledges are returned to the backers if the crowdfunding project fails,while under the KIA mechanism,the creators could always keep all the raised pledges.This study examines these two types of crowdfunding mechanisms.The AON mechanism puts a strict constraint on the entrepreneurs so that they take more risks,while the KIA mechanism transfers part of the risks to the investors so that the en-trepreneurs take fewer risks.The crowdfunding platforms can not assure that the en-trepreneurs will keep their promises to perform their obligations.Hence,the KIA mech-anism will make the investors distrust the entrepreneurs and hence,investors will be unwilling to pledge.On the other hand,the entrepreneurs are less motivated to offer higher products under the KIA mechanism so that the KIA mechanism sends a negative signal to the investors that the product quality level under the KIA mechanism is lower.According to the content of this paper,it can be separated into three parts.First,we develop a basic model to analyze the Stackelberg problem between the entrepreneur and the investors under both the AON mechanism and the KIA mecha-nism.The entrepreneur as a leader can choose either the AON mechanism or the KIA mechanism to launch the project,and then,the optimal price can be set.The investors as followers make their decisions based on the price and their valuations to maximize their utilities.We find that the creator prefers flexible funding when the unit production cost is relatively low.Second,we generalize our models by considering the product qualities in both the exogenous and the endogenous cases.Product quality level is an important factor in the investors' decisions because most of the products are very new to the market.The main results in the exogenous case are consistent with those derived in the basic model.Moreover,we find some new interesting results,for example,the creator will always provide the backers with higher-quality products under the flexible funding mechanism when the product quality level is endogenous.Third,we provide several interesting extensions of our studies on the fixed and the flexible funding mechanisms to show the robustness of our model,including the fol-lowing cases wherein:(i)the warm-glow takes effect,(ii)the number and the types of backers varies,(iii)the platform reacts to the flexible funding mechanism,and(iv)the backer's valuation follows normal distribution.These investigations enrich the study in crowdfunding,especially in the KIA mechanism.This paper can effectively guide the decision makers during the crowdfunding activities,including the mechanism choice,and the product and pricing decisions accordingly.Finally,we also offer some sugges-tions for the operation and management of the platforms so that they can develop the KIA mechanism to be more applicable.