Two-Sided Platform Governance: Are Founders Manipulating the Crowd in Crowdfunding?
The crowd is usually wise but can be subject to manipulation by insiders. Should crowdfunding platforms allow founders to invest in their own crowdfunding campaigns (called self-investment, or SI)? We use internal administrative records from a leading European crowdfunding platform to study platform governance on two-sided crowdfunding platforms. We build a model in which founders and regular investors have different incentives. Founders primarily care about successfully ending the campaign whereas regular investors care about investing in projects of high quality. Consistent with the model predictions, founders appear to try to exploit regular investors' intensified sensitivity to the public history of a campaign by making large anonymous SI when they see intensified sensitivity. They are also much more likely than regular investors to cancel an investment. Both actions might distort regular investors' belief formation. Therefore, crowdfunding platforms should consider increasing the transparency of large contributions and imposing some restrictions on founders in making SI in order to make the platform more efficient for early-stage financing.