Risk disclosure in reward-based crowdfunding: Voluntary or mandatory?

Abstract

Reward-based crowdfunding is characterized by high uncertainty in product delivery. This intrinsic risk feature elevates risk disclosure to a strategic concern, especially in a competitive crowdfunding market: (1) when will a creator voluntarily disclose his delivery risk information? and (2) what is the impact of a platform’s mandatory risk disclosure policy (MDP)? Our analysis yields some interesting findings. In particular, the information spillover effect may promote a high-risk creator to voluntarily disclose his risk information rather than free-riding on the disclosed information of a low-risk creator, in order to mitigate market competition. However, the interplay between the spillover effect and disclosure costs may lead two creators into the trap of the prisoners’ dilemma by withholding their risk information. Our analysis also suggests that MDP does not always harm the high-risk creator due to the mitigation of the spillover effect, and it can also help resolve the prisoners’ dilemma, thereby increasing both creators’ crowdfunding performance if disclosure costs are not excessively high. Nevertheless, contrary to the intuitive expectation that MDP will protect consumers’ interests by enabling them to make informed decisions, our results indicate that MDP may actually reduce consumer surplus by increasing crowdfunding prices.