Article

Rational Herding in Microloan Markets

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Abstract

Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel data set that tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders. Well-funded borrower listings tend to attract more funding after we control for unobserved listing heterogeneity and payoff externalities. Moreover, instead of passively mimicking their peers (irrational herding), lenders engage in active observational learning (rational herding); they infer the creditworthiness of borrowers by observing peer lending decisions and use publicly observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Similarly, favorable borrower characteristics (e.g., friend endorsements) weaken the herding effect, as lenders attribute herding to these observable merits. Follow-up analysis shows that rational herding beats irrational herding in predicting loan performance.

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... Although seemingly promising, not all crowdfunding projects can attract the desired amount of funding [3]. Information asymmetry in crowdfunding is pervasive, so that potential backers lack substantive knowledge on both the capabilities or trustworthiness and the characteristics of the proposed initiations [4][5][6]. ...
... Some work on the project quality signals embodied in the project descriptions [1,[6][7][8][9][10][11], creator-trustworthiness signals [8,[12][13][14][15], timing signals [16], founders' social capital [4], and product quality signals [14,17]. Some other researchers focus on the implicit information during the dynamic fundraising cycle, such as herding information among backers [5], creator-backer interaction [18], and information implied by contributing patterns of previous backers [16,19,20]. ...
... Various crowdfunding platforms (such as Kickstarter, Kiva, or SellaBand) reduce market frictions associated with geographic distance [19]. Remarkably, people still confront with uncertainty and information asymmetry on the trustworthiness of fundraisers [5] or project quality [11,30]. ...
Article
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Information asymmetry between backers and project creators impedes the crowdfunding success. Consequently, creators usually rely on various information to alleviate information asymmetry. Particularly, the location information of both backers and creators embodies their geographic and cultural distance, which may affect crowdfunding project attractiveness. Whereas current literature almost ignores the role cultural distance in crowdfunding, this research focuses on the reward-based crowdfunding, so that it becomes salient to form the appreciation and judgment of the innovative, creative, or artistic nature of projects. Meanwhile, geographic distance is examined to join the debates between flat world hypothesis and home bias proposition. A series of econometric models are examined based on a sample of 264 fundraising projects collected from Kitckstarter.com through Python program. Results show that cultural distance exerts a U-shape effect, which initially impedes the crowdfunding performance but promote projects when large enough. Geographic distance generally exerts insignificant impact on crowdfunding performance. Furthermore, cultural and geographic distance exerts the asymmetric effects on experienced versus new backers. This article underscores the important implications of cultural distance on reward-based crowdfunding. By showing the differential effects of cultural and geographic distance on experience versus new backers, it empirically infers the social capital as the underlying mechanism.
... Some researches observe a positive addition of observational learning in guiding consumers' decision in the markets such as restaurant (Cai et al., 2009) and group-buying deal (Luo et al., 2014). However, another research wave shows some situations in which observational learning is rather ineffective by itself, and other product-related information may intervene (Tucker and Zhang, 2011;Zhang and Liu, 2012). For example, Tucker and Zhang (2011) find that popularity information may disproportionately benefit niche products with narrow appeal, because the same level of popularity implies higher quality for products with narrow appeal. ...
... Evidence from prior studies shows that consumers are more willing to choose products with higher sales and popularity (Simonsohn and Ariely, 2008;Luo et al., 2014;Zhang and Liu, 2012). Thus, a large number of sales (indicating high popularity) can have a positive effect on perceptions of quality and increase product purchase intention. ...
... We classify this phenomenon as adequate observational learning because the same level of popularity implies higher quality for products with narrow appeal. Zhang and Liu (2012) indicate that instead of passively mimicking their peers, lenders' observational learning moderated by observable attributes of listings in microloan markets. Extending these ideas to the online retailing context, we have identified two observational learning modes that affect consumers' product evaluation and the different conditions under which they are activated. ...
Article
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Purpose To investigate the psychological mechanism of observational learning in the online retailing context, the purpose of this paper is to show how the psychological distance between consumers and products affects modes of observational learning. Design/methodology/approach Five experimental studies are conducted to test the hypotheses. Findings The findings show that which modes of observational learning are adopted by consumers is affected by consumers’ psychological distance. Specifically, when the psychological distance between consumers and products is proximal, consumers tend to adopt the termed adequate observational learning mode by considering the interaction of information about popularity and the breadth of appeal of a product to make purchase. However, when the psychological distance is distal, consumers would consider information of popularity and breadth of appeal separately without considering the interaction, termed as inadequate observational learning mode. The observed relationship between psychological distance and observational learning mode could be explained by the construal level. Research limitations/implications This research advances the observational learning and psychological distance literature by investigating the psychological mechanism behind observational learning modes. Limitations include the use of scenario-based experiments to test the hypotheses, investigation of a single product attribute (i.e. breadth of appeal) and assessment of popularity information by sales volume alone. Practical implications The current research provides a deeper understanding of consumer observational learning modes, which can help online retailers to develop effective product strategies and marketing tactics and, finally, achieve stronger competitive positions. Originality/value The present research contributes to the literature by examining the psychological mechanism involved in observational learning. This research distinguishes adequate and inadequate observational learning modes from the perspective of psychological distance.
... In an attempt to make up for the information asymmetry between them and project creators, possible contributors knowingly or unknowingly observe the behavior of others on the platform. For instance, they inspect how much was contributed to a project and when, which provides them with clues about the amount to contribute and when to do so [20,21,22,23,24,25,26]. Such social influence is common especially when it is difficult to establish the merit of a project [27,21]. ...
... For instance, they inspect how much was contributed to a project and when, which provides them with clues about the amount to contribute and when to do so [20,21,22,23,24,25,26]. Such social influence is common especially when it is difficult to establish the merit of a project [27,21]. This influence, mediated by social signaling can lead to substantial (rational or irrational) herding in crowdfunding [21,28,29,30,31], depending on whether serial contributors with a successful track record or random novices are being imitated [32]. ...
... Such social influence is common especially when it is difficult to establish the merit of a project [27,21]. This influence, mediated by social signaling can lead to substantial (rational or irrational) herding in crowdfunding [21,28,29,30,31], depending on whether serial contributors with a successful track record or random novices are being imitated [32]. ...
Preprint
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Crowdfunding continues to transform financing opportunities for many across the globe. While extensive research has explored factors related to fundraising success, less is known about the social signaling mechanisms that lead potential contributors to fund a project. Existing large-scale observational studies point to non-straightforward characteristics of prior contributions (aka "crowd signals") that forecast further contributions to a project, albeit without theoretical support for their effectiveness in predicting fundraising success. We translate empirical crowd signals based on variations in the amounts and timings of contributions into mock contribution scenarios to scrutinize the influence of essential signals on contributors' decisions to fund. We conduct two experiments with 1,250 online participants. The first experiment investigates whether high crowd signals, i.e., contributions of varying amounts arriving at unequally spaced time intervals, are making people more likely to contribute to a crowdfunding project. The second experiment further examines the effect of basic competition on the role of the crowd signals. Across both, we observe that high crowd signals attract 19.2% more contributors than low signals. These findings are robust to different project types, fundraising goals, participants' interest level in the projects, their altruistic attitudes, and susceptibility to social influence. Participants' unguided, post-hoc reflections about the reasons behind their choice to fund revealed that most were unaware of their reliance on any crowd signals and instead attributed their decision to nonexistent differences in project descriptions. These results point to the power of crowd signals unbeknownst to those affected by them and lay the groundwork for theory-building, specifically in relation to the essential signaling that is happening on online platforms.
... An investor does not have to finance the entire amount of a loan request,instead, they can bid at a minimum amount specified by the platform [36]. Investors make their investment decision based on their evaluation of the information shown on the platform, including the lending amount from peer predecessors, which makes herding behavior among investors possible (e.g., [4,28,56]). ...
... They also discovered a positive association between the herding level in the auction period and the subsequent loan performance. Zhang and Liu [56] also discovered evidence of herding among lenders. That is, well-funded borrower listings tend to attract more funding. ...
... A test of herding is to look for the sequential correlation in the herding amount [28,56]. If herding exists, a positive correlation is expected to be seen between (1) the lending amount of a given bid and (2) the cumulative lending amount the listing has received prior to this bid [28,55,56]. ...
Article
Full-text available
The peer economy, such as crowdfunding, democratizes access to tasks available only to professionals. Although the peer economy has gained great popularity in practice, how crowds infer information from their peers, especially from experts, is still under minimal study in academia. Using data from a debt-based crowdfunding platform in China, this study investigates the impact of seasoned predecessors’ bids on subsequent investors' decisions and how seasoned and unseasoned investors respond differently to herding signals. We discover that the cumulative lending amount from seasoned predecessors is positively associated with the lending amount of a successor, and such an association is greater if the successor is seasoned. In the repayment process, we find that the lending amount from seasoned investors is positively associated with loan performance, while the lending amount from unseasoned investors is not. Our results contribute to the literature on crowds of wisdom, implying that in a context that requires sophisticated knowledge, extracting hidden talents from experts rather than from crowds is more appropriate.
... Information asymmetry between the lender and the borrower is usually inevitable [6]. Reducing such asymmetry and improving market efficiency has become an important task and a daunting challenge for the lending platform [39,57]. In online P2P lending platforms, a lender does not have to finance an entire loan request. ...
... Therefore, potential lenders who are interested in a specific borrower listing could observe the existing bids that have been placed on the listing by prior lenders and reference such information to make their own investment decisions towards it. Given that the static information uploaded by borrowers themselves or provided by the lending platform is quite limited, it is of paramount importance for potential lenders to seek dynamic information generated in the auction process, especially a listing's existing bids from prior lenders, to facilitate investment decisions [57]. ...
... Prior studies have empirically evidenced that lenders tend to reference prior lenders' decisions while making their own in a rational-decision framework [24,40,57]. For instance, Zhang et al. [57] found evidence of rational herding among lenders that lenders infer the creditworthiness of borrowers by observing peer lending decisions. ...
Article
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This research examines the perception of shill bidding in the online peer-to-peer (P2P) lending market by looking into the influence of existing large bids of a loan request (also known as a borrower listing) on the investment decisions of potential lenders who are interested in this listing. We use two panel data sets of funding dynamics of borrower listings from two separate P2P lending platforms, XLending.com in China and YLending.com in the US. We identify the anti-herding effect of large bids using within-loan variations in the amount received in each period, the lagged cumulative number of large bids, and other observable time-varying listing attributes. The analysis reveals that large bids of a listing have a negative impact on the listing’s funding from potential lenders (i.e., the anti-herding effect) both in China and in the U.S. The finding suggests that, when making bidding decisions, lenders in an online P2P lending market are influenced by the perception of Internet shillings. Our analyses also suggest that this anti-herding effect of large bids is moderated by the number of bids. Interestingly, the examination of the association between large bids and ex-post loan default reveals a negative association, indicating the credit signaling functionality of large bids. The evident disparity between the reality (credit signaling of large bids) and bidders’ perception (the presence of large bids perceived as the result of Internet Shilling) illustrates an amplifying erosive effect of dishonest actions on bidders’ trust in information cues from the lending platform.
... However, the peer influence examined in these studies was comprised largely of the aggregate contributions of anonymous peers (e.g., cumulative number of prior backers; Burtch et al., 2013; J. Andrew Petersen served as Area Editor for this article. Kuppuswamy & Bayus, 2017;Zhang & Liu, 2012), rather than specific contributions of friends. Peer influence in friendship networks is a more powerful and personally relevant determinant of consumer decision making (Brown & Reingen, 1987). ...
... Relatively little attention has been paid to backer-related factors. Although research has found that peer influence plays a critical role in shaping backer behavior (Burtch et al., 2013;Kuppuswamy & Bayus, 2017;Zhang & Liu, 2012), the peer influence examined in these studies comprises mainly the aggregate contributions of anonymous peers rather than the specific contributions of friends. The likelihood that potential backers will pledge to a campaign is influenced by both the degree of their social interactions (tie level) and the characteristics of the influencers (node level). ...
... The motivations behind backer's pledge decisions in such campaigns are mainly driven by financial incentives and the desire for personal benefit in the form of tangible rewards (Gerber & Hui, 2016). Consequently, they are likely to be influenced by peers who can help them make accurate decisions (Zhang & Liu, 2012). In contrast, backers' contribution in social-oriented campaigns is driven by concerns about their social image and a series of non-financial incentives (Burtch et al., 2013;Hong et al., 2018). ...
Article
This research examines the influence of backers’ social networks on their backing behavior using data from a large social networking site and a reward-based crowdfunding platform. We distinguish the roles of nodes and ties in a backer’s social network and assess the combined and differential effects of these two types of social relationship on the backer’s pledge decisions. As backers have different motives for engaging in different crowdfunding campaigns, which range from commercially oriented technological innovation to community-based social development, we further examine how these effects differ between technology-oriented campaigns and social-oriented campaigns. We find that node-level factors (e.g., centrality) have a greater influence on technology-oriented campaigns than on social-oriented campaigns, while tie-level factors (e.g., embeddedness) have a stronger impact on social-oriented campaigns. Considering the two forms of embeddedness in tandem, we find that the effects of relational embeddedness on backers’ pledge decisions are not only moderated by structural embeddedness but also contingent on campaign type. These results offer important theoretical insights into the drivers of contribution, which should be considered by crowdfunding operators and campaign proponents seeking to stimulate contribution.
... It was found that especially friends and family members are among the first to support a project (Agrawal et al. 2015). Crowdfunding campaigns that have collected higher amounts of funding profit from a herding effect that drives people to further support the project because they trust the decisions of previous funders (Zhang and Liu 2012). However, if a project is close to reaching the designated funding goal, some kind of bystander effect leads to the effect that funders "do not contribute to a project that has already received a lot of support because they assume that someone else will provide the remaining financing" (Kuppuswamy and Bayus 2013). ...
... Often, research finds valuable support from theories of domains like psychology or finance for explaining these phenomena. For example, Zhang and Liu (2012) describe the herding effect of funding behavior. This effect has been previously discussed in the context of other financial topics as well as psychology (e.g., Olsen 1996;Prechter 2001). ...
... The approach of subjective expected utility (Savage 1972) considers such personal perspectives and explains that decision behavior is subject to both a personal utility function and a personal probability distribution of a specific consequence of a decision. Besides benefits of rewards, further effects, like aspects of altruism (e.g., Bretschneider et al. 2014) or herding effects (Zhang and Liu 2012), play an important role in crowdfunding. Nevertheless, it is difficult to match immaterial benefits to certain levels of utility or to find perfect personal utility functions embracing herding effects-although the approach of utility maximization would theoretically allow to do so. ...
Article
Full-text available
Crowdfunding platforms offer project initiators the opportunity to acquire funds from the Internet crowd and, therefore, have become a valuable alternative to traditional sources of funding. However, some processes on crowdfunding platforms cause undesirable external effects that influence the funding success of projects. In this context, we focus on the phenomenon of project overfunding. Massively overfunded projects have been discussed to overshadow other crowdfunding projects which in turn receive less funding. We propose a funding redistribution mechanism to internalize these overfunding externalities and to improve overall funding results. To evaluate this concept, we develop and deploy an agent-based model (ABM). This ABM is based on a multi-attribute decision-making approach and is suitable to simulate the dynamic funding processes on a crowdfunding platform. Our evaluation provides evidence that possible modifications of the crowdfunding mechanisms bear the chance to optimize funding results and to alleviate existing flaws.
... Increasingly, people recognise crowdfunding as an enabler of a variety of online fundraising activities that range from pro-social campaigns and supporting creative works to sizeable equity investments [1,5,9,33,55,65,69]. This growing phenomenon is effective in reducing barriers in access to capital by eliminating the effects of geographic distance between project creators and funders [3] and reducing the transaction costs of making such fundraising possible. ...
... We thus present a general approach that is robust to the particularities of different crowdfunding platforms and markets and focuses on the crowd that contribute capital. This idea is backed up by evidence for the importance of successfully attracting funders early in the campaign [22,28] and the role of subsequent herding in reaching the target amount [64,69]. The broad spectrum of projects and creators, the quick pace of funding, and untrained crowds using comparatively sparse data when selecting worthy projects are factors that substantially complicate decision-making in crowdfunding's low information and high-risk situations. ...
... On the one hand, there is evidence for strong marketplace influences on funders' behaviour: other projects available on crowdfunding websites can draw money away [66], while the structure and design of the platform also affects crowd engagement [17]. On the other hand, in line with findings about the importance of information cascades and herding in successful fundraising [64,69], most funders interpret the amount [45] and arrival time [2,22,28,61] of the first contributions as indicators of project quality. This crucial signalling among crowd members has triggered investigations into identifying descriptors of crowd dynamics that are associated with high-quality projects and successful crowdfunding [2,15,16,25]. ...
... This indicates that herding spotted is often just correlated trading and is an indicator of the "weakness" of empirical measures of herding. In Zhang and Liu (2012) the effects of herding on momentum and market anomalies is a question of intent. As the authors argue, it is extremely important to distinguish actual herding from the spurious one if we want to assess its risk for agents and the market. ...
... The question of intent is very important for herding as it is directly related to the effect of herding for the market. In Zhang and Liu (2012), it is shown how the motivation of mimetic behaviour is a key factor regarding the destabilisation of the market. When intention is established, momentum strategies and herding coexist and disrupt the market. ...
Chapter
The aim of this chapter is to provide insight into how investors and fund managers can handle their decision-making process and foster better allocation of financial assets. Investor sentiment offers promise in helping to understand how financial markets function, as well as to better predict market dynamics. This chapter presents a theoretical framework that is capable of rethinking financial markets. Agent-based approaches to finance and nonlinear models provide insights into the driving forces underlying the stylized facts characterizing financial markets and help to provide explanations for financial instability. We also show that the interdependence of agents can be reflected in interaction networks. Indeed, investors can change from one regime to another. Adjustment delays in prices are difficult to represent by simple linear models. To capture the complexity and further non-linearity generated by investors’ interactions, agent-based models, network analysis and thresholds models are well suited. We examine the extent to which these new tools could explain the persistence of asset price deviations. We highlight how these modeling tools contribute to a better integration of risk sentiment in asset management and thus can best describe financial markets’ reality.
... Second, our paper contributes to the literature on P2P lending. Recent investigations include Freedman and Jin (2011), Lin et al. (2013), Iyer et al. (2016), Zhang and Liu (2012), Wei and Lin (2017), and Xin (2020). ...
... Information asymmetry is an important problem in P2P lending. Learning by doing (Freedman and Jin 2011), credit scoring based on social networks (Lin et al. 2013 andIyer et al. 2016), herding (Zhang and Liu 2012), and reputation system (Xin 2020) are efficient strategies to mitigate information asymmetry. ...
Article
While extensive studies have investigated the credit pricing (e.g., interest rate adjustment) in P2P lending platforms, this study focuses on a more basic definition of interest rate – base rate, which plays a dominant role in manifesting the price trend on a platform. In this vein, as an increasing number of P2P lending platforms choose posted-price mechanisms (the platform determines the interest rate), a crucial but unanswered question is: how do interest rates affect market outcomes? Because P2P lending platforms are characterized by two-sidedness and information asymmetry, the effects of interest rate pricing on market outcomes may differ from the traditional one-sided market. We address our research question theoretically and empirically. We first construct a simple general model to investigate the effect of interest rate on the platform profit and investment risk, taking into account the participation decisions of lenders and borrowers and platform pricing strategies (i.e., transaction fees to users on both sides). Our model implies that the investment risk has a non-monotonic relationship with interest rates. Inspired by our theoretical analyses, we then conduct a robust and solid counterfactual econometric analysis and empirically show that an inverted U-shaped non-monotonic interest rate design demonstrates its advantages in reducing credit risks and improving the platform’s profits by 33.89%. This study extends our understanding of the role of price operation in two-sided platforms with platform mandated price mechanisms and information asymmetry; the findings have important policy implications for interest rate regulation in the P2P lending industry from the perspective of two-sided platforms.
... This indicates that herding spotted is often just correlated trading and is an indicator of the "weakness" of empirical measures of herding. In Zhang and Liu (2012) the effects of herding on momentum and market anomalies is a question of intent. As the authors argue, it is extremely important to distinguish actual herding from the spurious one if we want to assess its risk for agents and the market. ...
... The question of intent is very important for herding as it is directly related to the effect of herding for the market. In Zhang and Liu (2012), it is shown how the motivation of mimetic behaviour is a key factor regarding the destabilisation of the market. When intention is established, momentum strategies and herding coexist and disrupt the market. ...
Chapter
This paper is a comprehensive and complete research on bank failures that we examine from many different perspectives. It compromises a comprehensive dataset of ~60,000 observations for an extensive period (2005–2014) and examines different prediction horizons prior to failure. Moreover, we explore whether the addition of variables related to the diversification of the banks’ activities along with local effects, improve the predictability of the models. Seven popular and widely used machine learning techniques are compared under different performance metrics, using a bootstrap analysis. The results show that mid to long-term prediction improves significantly with the addition of diversification variables. Local effects exist and further improve the results, while, support vector machines, gradient boosting, and random forests outperform traditional models with the performance differences increasing over longer prediction horizons.
... Project quality signals from several studies include preparedness (Courtney et al., 2017;Mollick, 2014;Lin andPhillips, 2017, Olufolaji andPhillips, 2015), project description narrative (Allison et al., 2015), and contribution by others (Zhang and Liu, 2012;Burtch et al., 2013;Smith et al., 2014). Individual quality signals include gender, race and personal characteristics (Pope and Syndor, 2011;Gorbatai and Nelson, 2015;Marom et al., 2015), creditworthiness (Zhang and Liu, 2012), and social networks (Agrawal et al., 2013). ...
... Project quality signals from several studies include preparedness (Courtney et al., 2017;Mollick, 2014;Lin andPhillips, 2017, Olufolaji andPhillips, 2015), project description narrative (Allison et al., 2015), and contribution by others (Zhang and Liu, 2012;Burtch et al., 2013;Smith et al., 2014). Individual quality signals include gender, race and personal characteristics (Pope and Syndor, 2011;Gorbatai and Nelson, 2015;Marom et al., 2015), creditworthiness (Zhang and Liu, 2012), and social networks (Agrawal et al., 2013). Media usage can also reduce information asymmetry, thereby increasing the probability of obtaining funds (Freedman and Jin, 2008;Jia andPhillips, 2014, Liu et al., 2015;Courtney et al., 2017). ...
... We might nonetheless expect that, among crowdfunders, signaling with social capital (Courtney et al., 2017;Polzin et al., 2018), networks (Lin et al., 2013), and being an early "pre-mainstream" supporter (before the bandwagon) could play some sort of role (Hildebrand et al., 2016;Belleflamme et al., 2015;Kuppuswamy and Bayus, 2014). Findings have provided suggestive indications that for example observing funding can stimulate and encourage others to contribute (Zhang and Liu, 2012), at least by raising awareness and leading by example, if not merely raising expectations that funding goals might be reached (Vesterlund, 2003;Potters et al., 2007;Kuppuswamy and Bayus, 2017). Signaling one's funding may lead to others forming expectations that it is a "high quality" project worth funding (Naroditskiy et al., 2014). ...
... Signaling one's funding may lead to others forming expectations that it is a "high quality" project worth funding (Naroditskiy et al., 2014). Empirical research (Koning and Model, 2014;Kuppuswamy and Bayus, 2017) and theoretical conjectures (e.g., Agrawal et al., 2015;Zhang and Liu, 2012;Parker, 2014) have indicated that signaling one's funding could somehow influence follow-on investments. Thus: HYPOTHESIS 5. ("Encouraging Other Funders"): Crowdfunders can be motivated to increase their provision of funds by stimulating their interest in signaling their giving when it encourages others' contributions. ...
Article
Full-text available
The bulk of today's (“preorder-,” “reward-,” “gift-,” and “donation-based”) crowdfunding raises funds for small, private entrepreneurial ventures without granting funders private claims to the projects’ income or the ability to guarantee the realization and delivery of project outcomes. We theorize and show empirically – via a mixed-method approach applied to a representative and remarkably informative case – that the payoff structure for crowdfunders, akin to a public good contribution problem, leads to the tangible value of main project outputs exerting little influence on contributions to crowdfunding. This then raises the question of which funder motivations fund seekers may have to address to crowdfund their projects. We demonstrate the especially large role of non-pecuniary motivations and pinpoint three particular motivations that profit-seeking entrepreneurs may stimulate to be financed through crowdfunding. The findings hold important implications for entrepreneurs’ crowdfunding strategies, platform design, and our understanding of how this funding institution works in general. The study also adds to emerging research on the implications of the public good nature of crowdfunding.
... There are four main forms of crowdfunding: donations-based (Kappel, 2009), rewardsbased (Bellefamme et al., 2014;Colombo et al., 2015;Mollick, 2014), debt-based (Zhang and Liu, 2012) and equity-based (Ahlers et al., 2015). These forms differ in terms of the investment and the expectations of investors. ...
Article
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Purpose This conceptual paper focuses on a common observation in the implementation stage of reward-based crowdfunding (RBC) – entrepreneurs' failures and delays in delivery of rewards to investors, which, in turn, may be perceived as violations of reward delivery obligations. Design/methodology/approach Drawing on entrepreneurial personality theory and psychological contract theory, this paper develops propositions and identifies factors related to both entrepreneurs (overconfidence and narcissism) and factors related to investors (types of motivators and psychological contracts) that may explain the perceived violations of reward delivery obligations. Implications for theory and practice are also discussed. Findings The theoretical analysis, by wielding two independently developed literatures, has demonstrated that it is important to investigate factors that are related to both investors and entrepreneurs in understanding issues and challenges at different stages of the RBC model. The authors believe that the current analysis provides an integrated understanding and a solid foundation for researchers to further examine these issues by empirically testing these propositions. Originality/value The authors examined two previously understudied psychological factors in the context of RBC – entrepreneurial traits, mainly overconfidence and narcissism, and the type of psychological contracts formed between investors and entrepreneurs, both of which, according to McKenny et al. (2017), need greater attention from researchers studying crowdfunding.
... According to them herding is positively linked with loan performance and this is reflected in repayments of loan by borrowers. The results of strategic herding are confirmed by Zhang and Liu (2012) who stated that lenders use the lending decisions of their peers to measure the creditworthiness of potential borrowers. In addition, unfavourable loan characteristics such as low creditworthiness increase herding (Andrews, 2010). ...
Article
Full-text available
Using Asymmetric Information and Social Networking theories the paper highlights the relevance of these two theories to crowdfunding. The study combines these theoretical perspectives with the practical aspects of startup companies raising finance using the crowd. The key concepts of these theories are critically considered and the study is conducted in the form of a review of the literature and expressing of opinion. Consequently, the experiential justification of the theories presented is not within the scope of this paper. The study is also limited generally to the field of crowdfunding as an alternate source of funding for start-up companies. We evaluate and discuss how lack of information between project initiators and backers can result in the project's inability to meet the project goal. We also consider how social network connection affects fundraising using the crowd. First, crowdfunding has some information difficulties because it involves the raising of funds using internet platforms. Second, the number of a founder's social network connections is associated positively with the capital raised from a project. Introduction The paper commences with an overview of the extant literature on the relevance of the theoretical aspect of crowd financing by reviewing the defining literature on Asymmetric Information and Social Networking theories in details. We also evaluate applications of these theories based on crowdfunding. In particular, we critically consider the key concepts of these theories and how they could be applied in practical terms. Existing research suggests that crowdfunding has become an alternative source of funding for most startup companies because of the inability of these startup companies to raise fund from banks and other traditional sources. This study offers several potential contributions to the literature on the emerging debate regarding the applicability of the two theories to the crowdfunding concept.
... The crowd's financial strength stems from the principle of collective action, which has proven to influence investment decision-making (Hornuf and Schwienbacher, 2018). Due to substantial financial stakes in for-profit crowdfunding, uninformed investors in particular refer to the behavior of their peers as a way of evaluating campaign quality or anticipating the likelihood of financing success (Burtch et al., 2016;Zhang and Liu, 2012). In this context, the formation of investment alliances has been identified as a strategy that enables individual investors to pool their strengths, while mitigating the inherent risk of investment decisions. ...
Conference Paper
This study explores informal alliances among crowd investors, extending recent work on social networks in (equity) crowdfunding. Beyond formal alliances (such as investment syndicates), informal coordination based on social learning has proven highly relevant to the dynamics and outcomes of financing campaigns. Using data from a leading equity crowdfunding platform, we analyze the informal network structures of investors where ties are based on joint investments over time. We benchmark these networks against random network formation processes and find overwhelming evidence for deliberate network formation. Moreover, we explore how certain investor attributes affect the network's structure. Specifically, this paper supports the notion that homophily drives social network formation, based on personal attributes such as gender and origin, but also on profile attributes (e.g. badges and images). Within the field of crowdfunding, this is one of the first studies to examine crowd investor networks both from an investor-and a cross-campaign perspective.
... Studies on whether herd behavior in the current P2P lending platform is rational are plentiful. Using data of Prosper, Zhang and Liu [21] found that investors' herd behavior is rational after controlling unobserved heterogeneity and payoff externalities, while Luo and Lin [22] measured the rationality of herd by the potential loss benefit and found herd behavior is irrational on Prosper. Chen et al. [23] made an empirical analysis on the data of China's Paipaidai platform and found that investors in Paipaidai showed obvious herding behavior, which was irrational because investors' herding behavior did not have a positive impact on the repayment performance of orders. ...
Article
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Based on the transaction data and related borrowers’ characteristics of Renrendai.com, this study conducts an empirical study on the influencing factors of the investor’s herd behavior and rationality of herd behavior on a Chinese online lending platform. We mainly find that investors’ herd behavior exists significantly on Renrendai.com; there is an “inverted U-shaped” relationship between the number of bids and the herd behavior of investors. When the number of bids exceeds a certain amount, the time required for the order to obtain another bid will be prolonged, and the investors’ herd behavior will be slowed down; herd behavior on Renrendai.com in Chinese market is a partly rational pursuit, but irrational in general.
... They find that owing to the herding effect, listings with partial funds are more likely to become loans, and loans based on herding behaviors in the past are more likely to be repaid. Zhang and Liu (2012) separates herding behaviors into irrational and rational herding by investigating whether the herding effect is moderated by observable listing attributes. It has been noted that such a distinction is critical as rational herding could be beneficial. ...
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Most loan evaluation methods in peer-to-peer (P2P) lending mainly exploit the borrowers’ credit information. However, the present study presents the maturity-based lender composition score, which exploits the investment capability of a group of lenders who fund the same loan, to enhance the P2P loan evaluation. More specifically, we extract lenders’ profiles in terms of performance, risk, and experience by quantifying their investment history and develop our loan evaluation indicator by aggregating the profiles of lenders in the composition. To measure the ability of a lender for continuous improvement in P2P investment, we introduce lender maturity to capture this evolvement and incorporate it into the aggregation process. Our empirical study demonstrates that the maturity-based lender composition score can serve as an effective indicator for identifying loan quality and be included in other commonly used loan evaluation models for accuracy improvement.
... Finally, actors in service platforms display nonlinear behavior and influence others in unpredictable ways (Chandler, 2019), which results in continuous change that, in turn, enhances complexity overall (Holland, 2014). As a case in point, lenders in P2P lending platforms display herding behaviors when selecting loans, that is, lenders tend to allocate funds to loan listings which are receiving funds from other lenders already (Zhang & Liu, 2012). ...
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Three critical barriers limit the development of knowledge about service platforms today: ambiguous definitions of what service platforms entail, overemphasis of a digital artifact, and the a-priori assumption that an established and mature service platform exists. The logics, mechanisms, and implications associated with the initial development, subsequent transformation, and evolution of service platforms throughout their lifetime are therefore poorly understood. To address these challenges, we use complex systems theory to reconceptualize service platforms as complex adaptive systems and delineate three distinct order levels of emergence in service platforms: first-order, second-order, and third-order emergence. Contextualized for peer-to-peer lending platforms, our study contributes new knowledge of the systemic dynamics of service platforms at different moments in time – initial formation or assemblage, functioning, and evolution, while also identifying and discussing mechanisms that propitiate emergence.
... There are four main forms of crowdfunding: donations-based (Kappel, 2009), rewardsbased (Bellefamme et al., 2014;Colombo et al., 2015;Mollick, 2014), debt-based (Zhang and Liu, 2012) and equity-based (Ahlers et al., 2015). These forms differ in terms of the investment and the expectations of investors. ...
... By this, we mean that as the network grows, any initial investment gets more strongly taken up by other investors, so that the first investment generates a stream of subsequent ones, at an accelerating rate. For example, Agrawal et al. (2011) argue that, because the process of investment is sequential, with funders drawing on accumulated capital as a signal of quality, the pitch process may create an information cascade (Bikhchandani et al., 1992;Anderson & Holt, 1997;Zhang & Liu, 2012;Vismara, 2018). For Easley and Kleinberg (2010), information cascades represent a form of irrational herding behavior because they entail people making decisions on the basis of other peoples' actions rather than their own information and judgement. ...
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As a digital financial innovation, equity crowdfunding (ECF) allows investors to exploit the complementarity of information provision and network effects in a reduced transaction cost environment. We build on the underlying distinction between soft and hard information and show that ECF platforms create an environment of greater information pooling that benefits from network externalities. We test our hypotheses using a unique proprietary dataset and find that soft information has a greater impact than hard on the likelihood that a financing pitch will be successful. Moreover, the effects of soft information are amplified by the size of the investor network on the platform and network size also positively moderates the effect of information on the amount invested during each pitch. We conclude that ECF platforms can successfully exploit low transaction costs of the digital environment and bring network externalities to bear on investor decisions. Taken together that these increase the supply of funds to entrepreneurs.
... 4 Devenow and Welch (1996) provide a review of papers on the economics of rational herding in financial markets, and Zhang and Liu (2012) provide evidence for this from microloan markets in the United States. See also Banerjee (1992), Bikhchandani et al. (1992) and Caplin and Leahy (1993). ...
Article
What can explain the large changes in aggregate demand that occur in the absence of any seemingly corresponding shock to the underlying state variables of the economy? We show that macroeconomic volatility can arise from dispersions of beliefs among agents. Such dispersion gives rise to bets and other trades in speculative assets. Such trades give rise to pseudo-wealth, wealth that individuals believe they have on the basis of expectations of returns on these gambles. In the aggregate, when there are enough opportunities for trade and large enough dispersions in beliefs, this perceived wealth may be dangerously untethered to either market wealth or the real wealth of the economy. Given the increased dispersion in beliefs that naturally arises from unprecedented shocks, the theory of pseudo-wealth provides new understandings of both the origins of unanticipated fluctuations and their magnitude, markedly different from prevailing theories grounded in common knowledge and beliefs among individuals. This paper explores the empirical and theoretical underpinnings of pseudo-wealth, links the concept to observed macroeconomic fluctuations, and lays out a research agenda that might help us better understand the role of pseudo-wealth and the circumstances in which it is pronounced.
... Emotional ties also play a role in crowdfunding when making investment decisions. There are also several studies in behavioral finance research that deal with herd behavior (Zhang & Liu, 2012;Agrawal et al., 2014;Bretschneider & Leimeister, 2017), home bias (Brem & Wassong, 2014;Lin & Viswanathan, 2015), and the feeling of solidarity (Ordanini et al., 2011) in crowdfunding. Thus, emotional attachment seems to be a determinant of investment behavior. ...
Article
In this study, we estimate an attendance demand model in a reduced form, with uncertainty as one of the determinants of demand, to test the uncertainty of outcome hypothesis (UOH). Data from the Russian Football Premier League (RFPL) are used. These data fit our requirements for two reasons. First, there are few sellout matches, so demand for tickets in the RFPL is not restricted by stadium capacity. Secondly, there have been no articles devoted to the study of outcome uncertainty in the RFPL. The results indicate that the UOH does not explain the behavioral pattern of attendees in the RFPL. The dependence between attendance and uncertainty is U-shaped. We observe some evidence that attendee’s utility in the RFPL depends more on seeing a home team win.
... Early research on crowdfunding outside Nigeria indicates that Funding is not geographically constrained, The propensity of individual funders to invest in a project increases rapidly with accumulated capital (Agrawal, Catalini, and Goldfarb, 2011), and that the acceleration is particularly strong towards the end of the fundraising campaign, similar to online lending platforms (Zhang and Liu, 2012). Friends and family funding plays a key role in the early stages of fundraising, generating a signal for later funders through accumulated capital (Agrawal, Catalini, and Goldfarb, 2011). ...
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The global growth rate of equity crowdfunding of which Crowdfarming is a brand has surpassed the projected limits. Crowdfarming serves as alternative finance and platform for interested small scale investors in farming in many countries. This Paper investigates the diversity of crowdfarming platforms among investors in all the five administrative divisions of Lagos state. Three hundred participants were selected using purposive sampling techniques and used for the study. The data were summarized using frequencies and percentages, while Shannon Entropy Index was applied to analyse the diversity of crowdfarming among participants in the administrative divisions. The results showed majority of the participants were male (59%) with average family size of all crowdfarming participants being 5.83. Average household size was highest in Lagos Island (Eko) (7) and Epe (7) and lowest in Ikeja (4). Younger respondents (22-55 years) constitute the majority of crowdfarming participants (72%). Average total amount invested was #566,634; highest in Ikeja (#230,000) and lowest in Epe (#95,155). Thus showing high rate of investment flow to crowdfarming. The Shannon diversity index was 1.16 depicting crowdfarming platforms were evenly distributed across the state. Ikeja and Badagry have uniform diversity of Crowdfarming participants (H=1.07), followed by Ikorodu (H=0.89). Lagos Island has the lowest diversity (H0.80). Even distribution of crowdfarming platforms investment should signal improved monitoring for financial security of Lagosians; and eye-opener to step up measures to stem or prevent market failures.
... A key objective in crowdfunding is to generate excitement or buzz around a new product, creative endeavor, or activity, which should be reflected in campaign language. This is particularly important, as herding behavior is common among crowdfunding backers (Stevenson, Ciuchta, Letwin, Dinger, & Vancouver, 2019;Zhang & Liu, 2012). Herding occurs when individuals decide to do what others are doing after observing a particular behavior and often occurs when individuals become excited (Banerjee, 1992). ...
Article
When it comes to raising money via crowdfunding, the language used in campaign narratives matters. Little practical guidance has been offered to those wishing to use crowdfunding concerning how to tailor the language in a crowdfunding campaign to enhance funding prospects. We take insights generated in academic research and distill those down to practical guidance for crowdfunding users. Here, we focus on two important aspects of language. First, we highlight how language that provides insight into the entrepreneurs’ personality—words expressing positivity, charisma, resilience, or narcissism—relates to funding. Second, we outline how various linguistic styles used to describe the general topics of the campaign relate to funding. Our work is particularly applicable to one of the most popular forms of crowdfunding: rewards-based crowdfunding.
... Another commonly used distinction of crowdfunding platforms is based on the type of rewards for the supporters. Here, researchers differentiate between lending-based and equity-based crowdfunding platforms [20,21,22,10,23,24,25]. ...
... Information asymmetry can be remedied through analysts who can rate the company's securities; securities law, which forces insiders to disclose information about the company; reputational concerns that can influence the company's actions and credible contract-based signals (Ibrahim, 2018). Since lenders are uncertain about the creditworthiness of the project, the borrower should unlock information concerning the project and privately message the lenders (based on rational herding including homogenous listed information) concerning the quality of the project, the amount requested, the interest-rate offered, the number of friend endorsements, and other matters (Zhang and Liu, 2012). The behavioral mechanism built upon can affect critically what strategies the supply-side will be willing to undertake. ...
Article
Purpose This paper aims at shedding light on the entrepreneurs' perception towards crowdfunding as a new mean for raising capital, and their willingness to send appropriate signals to the potential fund providers/backers. Design/methodology/approach The research strategy is based on three methodological approaches: desk research on online sources, a map of the crowdfunding phenomenon, and a quantitative approach with a survey performed between June and December 2020. The survey covers a sample of 147 Small and Medium enterprises (SMEs) and startups, in addition to semi-structured interviews with 10 entrepreneurs. Findings The study reveals that between losing their work and losing part of their firms' equity, entrepreneurs are keen on sending positive signals to backers. Moreover, they are willing to adopt a new way of thinking, as their primary goal is to save their firms, their jobs, and their source of income. The research highlights the concern of entrepreneurs of losing reputation, losing intellectual property, losing control, and of becoming only shareholders in their enterprises. Research limitations/implications The main limitation in this paper is that no single study in Lebanon adequately covers the topic and thus extensive research has been carried out on crowdfunding across the world and analyzed in the Lebanese context. Practical implications Overcoming funding challenges can reduce brain drain, promote a culture of entrepreneurship, serve the economy, combat poverty, achieve more equitable society, increase the levels of expectations, and turn the flywheel. Moreover, the paper presents clear implications for the field of policy-making both in developing and developed countries. Originality/value Considering the serious financial disintermediation and liquidity shortage Lebanon faces, the findings of this study show how important changing entrepreneurial culture and behavior is, and the crucial role crowdfunding could play in providing funds for the SMEs that form 95% of the total business sector in Lebanon.
... Nonetheless, the idea that individual investors can be capable of making beneficial choices in a crowdfunding setting is a recurrent one in the literature. For example, papers such as Zhang and Liu (2012), Parker (2014), Vismara (2018) and Hornuf and Schwienbacher (2018) explore how individual investors may be able to benefit from interaction during a crowdfunding campaign and achieve results that thye could not obtain on their own. Also papers such as Cumming et al. (2019) and Cumming et al. (2020) argue that the design and rules of the crowdfunding platforms themselves can be integral to the success or failure of individual investors. ...
Article
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In this paper, we consider a two-period model where individual investors supply funds to entrepreneurs either indirectly, through a financial intermediary, or directly, using equity crowdfunding. The entrepreneurs vary in terms of the quality of their business projects and ex ante, both the investors and intermediaries are imperfectly informed about their types. The main trade off between the two forms of investment is that crowdfunding is assumed to involve lower costs and higher risk relative to how intermediaries invest their funds. Given this framework, we study investor behavior and find that at intermediate levels of risk for the crowdfunding investment, investors elect to utilize both crowdfunding and financial intermediation in equilibrium. Furthermore, we find that when transaction costs of investment are high, as can be the case with opaque types of small business ventures, this increases the incidence of crowdfunding as the optimal form of investment.
... été menées sur la question. Sur les plateformes de prêt, les comportements des financeurs ont été étudiés à partir de données de la plateforme Prosper.com(Herzenstein et al., 2011). Les chercheurs mettent en évidence un comportement stratégique : plus il y a de prêteurs, plus cela augmente les chances que de nouveaux individus prêtent à leur tour.Zhang et Liu (2012) ont également analysé des données de Prosper.com et montrent que les prêteurs observent les décisions d'autres prêteurs et utilisent cette information pour déduire la solvabilité des emprunteurs. Yum et al. (2012) confirment ce résultat mais sur un autre site, Popfunding.com. Les prêteurs s'appuient sur leur propre jugement lorsque des ...
Thesis
Depuis la fin des années 2000, les plateformes de financement participatif se développent en France avec la promesse d’une relation directe, désintermédiée, entre demandeurs de financement et financeurs, en facilitant l’accès aux fonds pour des porteurs de projet et en permettant aux Français de financer les projets de leur choix. Cette thèse vise à étudier ce phénomène à partir d’une enquête combinant observation ethnographique et entretiens menés auprès des différents acteurs qui se sont organisés pour faire exister et développer ce secteur d’activité. L’enquête montre que l’institutionnalisation du financement participatif en France résulte d’une action collective impliquant des professionnels du secteur, des représentants des pouvoirs publics, des partenaires de plateformes et des médias. Alors que les plateformes défendent un modèle d’auto-organisation et d’autonomie, il apparaît que le développement des plateformes n’aurait pas été possible sans l’intervention des pouvoirs publics qui ont créé un cadre juridique favorable au financement participatif, au nom d’une volonté de faire évoluer le rapport des Français à leur épargne et d’amener ces derniers à contribuer à la santé économique des entreprises dans un contexte de crise. L’enquête montre aussi que par-delà l’extrême hétérogénéité des trois modèles majoritaires de financement participatif étudiés (don/contrepartie, prêt et capital), un effort collectif est fait pour mettre en valeur les points communs et gommer l’hétérogénéité des secteurs concernés (d’un côté le monde de la création culturelle, de l’autre le monde de la finance). Les plateformes, en tant que dispositifs socio-techniques, cherchent à se présenter comme des instruments neutres qui favoriseraient un appariement naturel entre des demandeurs de fonds et des financeurs. Cette recherche montre au contraire que l’essor de ce modèle de financement est le fruit d’un travail marchand mené par les professionnels du secteur pour recruter deux types d’usagers sur leur plateforme : des demandeurs de fonds d’un côté et des financeurs de l’autre. L’enquête montre les arbitrages opérés par les plateformes entre une logique de volume et une logique de qualité. Pour réduire le risque, les plateformes mettent en place des systèmes de qualification et de sélection des projets, souvent importés de la finance traditionnelle, qui entrent en contradiction avec les discours de démocratisation de l’accès au financement. Dans leurs efforts de développement, elles cherchent aussi à nouer des relations avec les acteurs traditionnels du monde de la finance. Ce faisant elles réintroduisent de nouveaux intermédiaires qui viennent complexifier la relation entre demandeurs de fonds et financeurs.
... Existing studies predominantly worked with data from the US-based Lending Club (Bastani et al. 2019;Emekter et al. 2015;Guo et al. 2016;Jin and Zhu 2015;Serrano-Cinca and Gutiérrez-Nieto 2016;Serrano-Cinca et al. 2015;Teply and Polena 2020;Xia et al. 2017b;Ye et al. 2018) and Prosper (Guo et al. 2016;Miller 2015;Wang et al. 2018;Zhang and Liu 2012;Zhang and Chen 2017), leaving other P2P market platforms underrepresented in the literature. Our primary interest is establishing the validity of the PS models using data from a European lending platform Bondora. 2 However, to establish a fair comparison across markets and validate our PS models, we also use a random sample of loans from the Lending Club marketplace. ...
Article
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For the emerging peer-to-peer (P2P) lending markets to survive, they need to employ credit-risk management practices such that an investor base is profitable in the long run. Traditionally, credit-risk management relies on credit scoring that predicts loans’ probability of default. In this paper, we use a profit scoring approach that is based on modeling the annualized adjusted internal rate of returns of loans. To validate our profit scoring models with traditional credit scoring models, we use data from a European P2P lending market, Bondora, and also a random sample of loans from the Lending Club P2P lending market. We compare the out-of-sample accuracy and profitability of the credit and profit scoring models within several classes of statistical and machine learning models including the following: logistic and linear regression, lasso, ridge, elastic net, random forest, and neural networks. We found that our approach outperforms standard credit scoring models for Lending Club and Bondora loans. More specifically, as opposed to credit scoring models, returns across all loans are 24.0% (Bondora) and 15.5% (Lending Club) higher, whereas accuracy is 6.7% (Bondora) and 3.1% (Lending Club) higher for the proposed profit scoring models. Moreover, our results are not driven by manual selection as profit scoring models suggest investing in more loans. Finally, even if we consider data sampling bias, we found that the set of superior models consists almost exclusively of profit scoring models. Thus, our results contribute to the literature by suggesting a paradigm shift in modeling credit-risk in the P2P market to prefer profit as opposed to credit-risk scoring models.
... In the third phase, potential donors are again more likely to donate to a given campaign for two reasons. First, potential donors might find a campaign with higher cumulative donations more desirable since it is more likely to reach its goal, also referred to as payoff externalities (Zhang and Liu 2012). Second, the goal gradient motivation kicks in. ...
Article
Crowdfunding is an online method of fundraising from a large audience. Digital Word of Mouth (DWOM) via social media has become a popular promotion platform for crowdfunding campaigns due to its negligible nominal cost. While one may expect that promoting these campaigns on social media may steadily increase donations, the exact dynamics of such promotions have not been studied for donation-based crowdfunding. We collect panel data on several unique donation campaigns from a major donation-based crowdfunding website (gofundme.com) and analyze them employing a variety of econometric techniques. We specifically provide empirical evidence that promoting crowdfunded charitable campaigns using social media follows three phases throughout a campaign's lifecycle. Our results indicate that the general pattern of behavior is the same for charitable campaigns as it is for reward-based campaigns. This suggests that the psychological motives outlined in the literature are important for both types of campaigns. Because the economic motives are not present, this finding would not be clearly anticipated. We show that the contributing role of social media in a campaign's success varies over time and that it is most helpful in the first ten days of initiating a campaign. We also provide preliminary evidence that promoting charitable campaigns on social media can lead to slacktivism, an unexpected consequence of using social media as a promotion tool resulting in less donations and more social media flurry. We also find that if a campaign does not reach at least 70 percent of its goal after twenty days since launch, it is not likely to be successful. Fundraisers and charitable marketers can use our findings in gauging the effectiveness of raising awareness about their campaigns in the online world. They could also streamline the timing of social media promotions to enhance their impact on collecting donations for charitable causes.
... Kim and Viswanathan (2019) explore how experienced investors are able to identify the nuanced differences in the underlying expertise of the early investors, even though they are inexperienced in this (crowdfunding) market. Herzestein et al. (2011), Lee and Lee (2012) and Zhang and Liu (2012) explore the influence of early investors on late investors and find broad evidence of herding behaviours in crowdfunding markets. Baeck et al. (2014) and Moritz et al. (2015) explore the informational cues that less-experienced investors are looking at, including the visibility of investment decisions of the more-experienced investors. ...
Article
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Based on a unique dataset of survey respondents on crowdfunding with financial returns, we build on existing literature on the impact of a continuous belief-update mechanism on risk perceptions, to explore whether such a mechanism also applies in crowdfunding with financial returns. We apply a 2-level analysis and show that “experienced” and “heavier” investors perceive risks at lower levels than inexperienced and “lighter” users. Our results have important implications as regards our understanding on how crowdfunding users perceive risks and on how investing via crowdfunding can be encouraged i.e. via providing “first investment” motives.
... Steils and Hanine [14] show that instructional constraints have different effects on reward-oriented solvers and intrinsically motivated counterparts in crowdsourcing contests. Among crowdfunding and microloan platforms, sophisticated investors and less-experienced crowds are regarded as two different groups, with the latter often exhibiting herding behaviors [53,54]. If funders possess great ability and motivation, they will delve into careful consideration of issue-relevant information in task instructions [41]. ...
Article
Task instructions are seeker-generated content aiming to disclose information and persuade solvers to participate in crowdsourcing contests. There are various writing strategies for task instructions, with different levels of informativeness and persuasiveness for solvers. This work examines how requirement-oriented and reward-oriented strategies affect solver participation. The empirical results reveal a U-shaped relationship between the usage of restrictive words and the number of participants. In contrast, an inverted U-shaped relationship is found between terminology usage and participation. Emphasizing intrinsic and extrinsic rewards through issue-relevant information statements and emotional appeals also proves to be effective in motivating solvers’ involvement.
... Advancements in information and communication technology (ICT) allow crowdfunding platforms to eliminate the requirement for physical interaction and consequently making easier for those seeking funding (whether people or companies) to reach a high number of professional and amateur investors (for a detailed description, see Belleflamme et al., 2014). Investors will receive some form of physical or moral reward in proportion to the invested funds (Zhang and Liu, 2012). Since its inception, several forms of crowdfunding have been developed, depending on the way in which investors are recompensed. ...
Article
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Purpose Belonging to the financial technologies' companies, equity-based crowdfunding platforms offer investors the opportunity to become shareholders through the purchase of small equity stakes of new innovative ventures. This paper aims to investigate gender-related differences in the behaviour of investors in firms seeking equity financing in Latin America. Design/methodology/approach Using a unique database, with combined information from different equity crowdfunding platforms in Brazil, Chile and Mexico, the authors study the population of 492 projects between 2013 and 2017. To analyse the relationship between investors' gender-related differences and equity crowdfunding investment, this paper applies Poisson regression. Findings Results suggest that the probability that an investor finances a firm is based on gender bias. Investors prefer firms led by entrepreneurs that are similar to them in terms of gender. Furthermore, the authors find evidence that both female and male investors are risk-averse and are more likely to invest in the equity of firms that are older and offer a higher percentage of equity. However, female investors are associated with firms that are on average older and offer 0.02% more equity. Practical implications These findings have implications for crowdfunding platforms managers when selecting their target companies and policymakers when defining political actions to promote greater use of equity crowdfunding among female entrepreneurs and decrease barriers hindering women's access to investment. Originality/value-Unique in its proposition and data usage, this study sheds light on the relationship between investors and entrepreneurs in the Latin American equity crowdfunding market.
... Herd behavior has been studied in other contexts as well, such as in innovative activity by firms (Melissas, 2005), in the application for kidney transplants in the US (Zhang, 2010), in lending in the microloan market in the US (Zhang and Liu, 2012), in seed choices by cotton farmers in Andhra Pradesh in India and in the launch of new products by firms (Liu and Schiraldi, 2011). ...
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This article sheds light on a scarcely explored area of research relating to herd behavior in urban setting of developing economies, where the use of motorized two-wheelers have been increasing rapidly. Using a primary survey-based data from Nepal, we examine whether potential motorcycle buyers in the Kathmandu valley exhibit herd behavior or price-conscious behavior when making a hypothetical choice decision and then evaluate the determinants of the observed behavior. Using factor analysis, the paper identifies distinct homogeneous groups of respondents based on their preferences towards motorcycle attributes and on their psychological traits and attitudes. Not only we find a prevalence of herding in the choice of motorcycles, the results also find strong suggestive evidence that, in addition to gender and income, several latent factors related to preferences and psychological traits might play a crucial role in determining the herd behavior. We discuss policy implications in the context of consumer behavior and environmental policy in the backdrop of rapid vehicle demand and dangerous air pollution levels.
... And, it is meaningful to explore the correlation of participants' attentions in the whole private lending market in China. Recent research on the private lending market system mainly includes (1) the related research on the P2P lending market, such as borrowing success rate and default rate [14][15][16][17][18], investor behavior [19][20][21][22], and credit evaluation and market mechanism [23][24][25][26][27][28]; (2) the relationship between the informal credit market and the formal credit market [6,[29][30][31][32]; and (3) the research on offline loan [33][34][35]. erefore, this paper expands the research scope of the existing literature by investigating the extent of interdependence across time to clarify whether participants' attentions to P2P lending and offline loan are segmented or becoming more integrated. ...
Article
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In this paper, we examine the dynamic cross-correlations between participants’ attentions to the P2P lending and offline loan (lending) with the method of multifractal detrended cross-correlation analysis (MF-DCCA). The empirical result mainly shows that (1) the power-law cross-correlation exists between participants’ attentions to the P2P lending and offline loan and is persistent, (2) the cross-correlation is more stable in the short term, and (3) the relation subjected to a small fluctuation is more cross-correlated than that under larger ones. Furthermore, we carry out the robustness test to verify the result. The Granger causality test indicates that participants’ attentions to P2P lending and offline loan Granger cause each other in the short term.
... The number of people who have bought a product or service is a basic information that is technically easy to implement but with great effectiveness (Li and Wu 2018). Previous sales volume information reveals the actions of other consumers, so supposedly increase certainty about product quality, inducing consumer to herd, without including the reasons behind them (Bikhchandani et al. 1992;Bikhchandani et al. 1998;Zhang and Liu 2012). Thereby, previous sales information may be caused by randomness in early consumer choices, in this case herding does not lead necessarily to buy the 'best' product (Simonsohn and Ariely 2008;Zhang 2010). ...
Thesis
Results from this thesis have been published in the following paper: https://doi.org/10.1016/j.digbus.2021.100018 Social media has developed to become an integral part of people's lives. It is used on a daily basis to communicate, share or rate, and thus the opportunities to observe other consumers' decisions has significantly increased. Likewise, considering herd behaviour — according to which people discount their own information to imitate others — the transparency of other people's opinions by social media might influence consumers' buying decisions. As social media has become one of the most important sources of information in consumers' purchasing decision process, firms need to face these challenges accordingly. This can result in both opportunities (e.g. through the targeted use of social media to promote products) and risks (e.g. uncontrolled negative exchange of information about products). It is therefore essential for firms to build up a better understanding of customer behaviour along the entire buying decision process in the context of social media. This is particularly critical for industries, whose business model is based on contractual relationships with customers and which operate in a highly competitive market. The mobile communications industry is a good example of such an industry; therefore, it is in their interest to deal with the entire buying decision process to ensure that customers once acquired remain loyal to them for as long as possible. Nonetheless, despite a large body of literature exploring the single topics of herd be-haviour, buying decisions and social media, little is known about the complex inter-play of the three topics, and the focus on the individual pre-buying, buying and post-buying decision phases. Thus, based on a comprehensive literature review, catego-ries were developed through a qualitative summary of the material, which give a ho-listic overview of the combined research area. Then, the topic is specifically ad-dressed in the mobile communications industry from different perspectives in three further empirical studies. Through the analysis of user-generated content of three different social media plat-forms relating one mobile provider, and using a qualitative content analysis, the so-cial interactions on mobile communications topics are examined more closely. The findings provide novel social interaction categories, which indicate that some interactions seem to be specific to certain platforms. Based on conducted expert interviews, determining factors of herd behaviour in buying decisions influenced by social media in the mobile communications industry are identified. The findings show that there is no single factor, but rather multiple factors like drivers of social media usage, other influencing groups, segment or product specifics or social media activity. To develop a deeper understanding on herd behaviour along the buying decision phases in the context of social media, an online survey was conducted with regards to mobile products. The findings show that subjects use the information from others as cues in making buying decisions, whereby the influence decreases along the buying process and in the post-buying phase, where people no longer seem to follow the herd. Additionally, recommendations of other consumers exert a stronger influence on subject choices than those of experts. Finally, friends seem to influence consumers' choices more than social media. Product Involvement shows a certain influence in the buying phase, and with regards to social media activity, people who consider themselves to be participants are probably most likely to be influenced by rating platforms. In summary, this dissertation provides a comprehensive insight into the field of re-search on herd behaviour in the consumer buying decision process, considering different influencing aspects. Moreover, it shows interesting opportunities for further research in this field and presents valuable suggestions for practitioners in the mobile communications industry.
... Furthermore, funders seem to respond to quality signals, such as disclosure of detailed information about risk and internal governance information, as shown in the study of Ahlers et al. (2015). Also, Zhang and Liu (2012) and Hornuf and Schwienbacher (2015) find evidence of herding behaviour in p2p lending and crowdinvesting (profit participating notes and loans) respectively. In a piece of work in progress, Bretschneider et al. (2014) identify 10 motives based on related literature in their effort to develop a research model to identify the crowd's motivation for investing in start-ups. ...
Article
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This paper explores differences between equity crowdfunding and peer-to-peer (p2p) lending determinants of cross-border activity, from a user’s perspective. We use a unique database of survey respondents, registered in equity crowdfunding and p2p lending platforms across Europe. We find clear differentiations between equity crowdfunding and p2p lending. Equity crowdfunders are driven mainly by excitement while p2p lenders are driven by higher returns. As regards cross-border activity, equity crowdfunders are almost 7 times more likely to invest in foreign projects. Both equity crowdfunders and p2p lenders try to achieve diversification via cross-border activity, following however different strategies. We conclude that these differences should be taken under consideration, while implementing the pan-European regulatory framework for crowdfunding with financial returns (ECSP).
... Studies suggest that relatives are the main sources of funding support at the early stage of crowdfunding (Groza et al. 2020). Another aspect is the group behavior of the fund backers-the herd or hive mindset (Zhang and Liu 2012). Investors follow the crowd, believing in safety in numbers (Li et al. 2020a, b). ...
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... Zhang and Liu [19] mentioned the success stories of how ArtistShare in the US managed a website to raise the fund for the artist's albums between 2000-2001. Another researcher Worner [7] mentioned six advantages for going crowdfunding platform. ...
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... It has been well established that the physical presence of others increases consumers' need to conform to a group norm or consensus by creating a desire to manage impressions, leading people to act in socially desirable ways (Cialdini, 2009;Leonardelli et al., 2010). The presence of others can also cause consumers to adopt an accuracy heuristic favoring the group consensus (Cialdini, 2009;Puntoni & Tavassoli, 2007;Zhang & Liu, 2012). An important premise undergirding the effect of conformity is that both the consensus and consumers' own judgment(s) are observable in the context of these studies. ...
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... Emotional ties also play a role in crowdfunding when making investment decisions. There are also several studies in behavioral finance research that deal with herd behavior (Zhang & Liu, 2012;Agrawal et al., 2014;Bretschneider & Leimeister, 2017), home bias (Brem & Wassong, 2014;Lin & Viswanathan, 2015), and the feeling of solidarity (Ordanini et al., 2011) in crowdfunding. Thus, emotional attachment seems to be a determinant of investment behavior. ...
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Chapter
Crowdfunding is a form of financing or fundraising where a large number of investors pool their small (typically) individual contributions to support a project offered by an entrepreneurial firm. It is sometimes credited to be one of the top 10 innovations of the twenty-first century. This chapter discusses the basics of crowdfunding. It starts with a description of new innovative terminology related to crowdfunding. Examples include such terms as project founders/originators, project supporters/backers, crowdfunding platform etc. It then focuses on the foundations and details of the main types of crowdfunding, which includes reward-based crowdfunding, equity-based crowdfunding, debt-based crowdfunding and donation-based crowdfunding. We then discuss some major theories of crowdfunding including asymmetric information-based and moral hazard-based theories. For each theory, its major implications are presented and compared with available evidence. Particular attention is paid to the basics of crowdfunding in the public sector. We discuss government participation in crowdfunding and its role in the context of previously discussed theories. The benefits of government participation in crowdfunding projects include increasing trust in projects, improving information and increasing transparency related to projects, and reducing project risk.
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In analyzing panel data, the issue of heterogeneity across households is an important consideration. If heterogeneity is present but is ignored in the analysis, it will result in biased and inconsistent estimates of the effects of marketing mix variables on brand choice. The authors propose the use of a random effects specification to account for heterogeneity in brand preferences across households in a logit framework. The model parameters are estimated by both parametric and semiparametric approaches. The authors also compare their results with those obtained from logit models in which observed past choice behavioir is used to capture such heterogeneity. The different models are estimated with the IRI saltine crackers dataset. A formal statistical test of the model specifications shows that the semiparametric specification is the most preferred in terms of the overall fit of the model to the data. In addition, that specification predicts best when the models are validated in a holdout sample of households.
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In many markets, there is likely to be correlation both across periods in terms of the choices of one consumer and across consumers in terms of their choices in each period. The former is caused by consumer heterogeneity, and the latter may be the result of demand common shocks across consumers. Furthermore, if firms partially observe these common shocks, their market decisions may end up being endogenous and correlated with the common shocks. Because researchers cannot typically fully observe consumer heterogeneity and the common shocks, the estimation method must account for the endogeneity of firms' decisions. In this article, the authors present a test for endogeneity under unobserved consumer heterogeneity and common shocks, which is based on a quasi-likelihood estimation method, to estimate the model parameters consistently when endogenous firm behavior, unobserved heterogeneity, and common shocks are present. The test examines the differences in general method of moments coefficient estimates of a model with and without instrumenting for the explanatory variables. The authors show theoretically that in their estimation method, unobserved heterogeneity does not affect the consistency of the parameter estimates, but if it is not accounted for, endogeneity may bias the results. They present estimation results from simulated and scanner panel data.
Article
Online Peer-to-Peer (P2P) loan auctions enable individual consumers to borrow and lend money directly to one another. We study herding behavior, defined as a greater likelihood of bidding in auctions with more existing bids, in P2P loan auctions on Prosper.com. The results of an empirical study provide evidence of strategic herding behavior by lenders such that they have a greater likelihood of bidding on an auction with more bids (a 1% increase in the number of bids increases the likelihood of an additional bid by 15%), but only to the point at which it has received full funding. After this point, herding diminishes (a 1% increase in bids increases the likelihood of an additional bid by only 5%). We also find a positive association between herding in the loan auction and its subsequent performance, that is, whether borrowers pay the money back on time. Unlike eBay auctions where herding impacts bidders adversely, our findings reveal that strategic herding behavior in P2P loan auctions benefits bidders, individually and collectively.
Article
We examine the role of identity claims constructed in narratives by borrowers in influencing lender decision making regarding unsecured personal loans. We study whether the number of identity claims and their content influence decisions of lenders and whether they predict longer-term performance of funded loans. Using data from the peer-to-peer lending website Prosper.com, we find that unverifiable information affects lending decisions above and beyond objective, verifiable information. Specifically, as the number of identity claims in narratives increases, so does loan funding but loan performance suffers, because these borrowers are less likely to pay back. In addition, identity content plays an important role. Identities about being trustworthy or successful are associated with increased loan funding but ironically they are less predictive of loan performance compared with other identities (moral and economic hardship). Thus, some identity claims are meant to mislead lenders while others are true representations of borrowers.
Article
We analyze discrimination in a new type of credit market known as peer-to-peer lending. Specifically, we examine how lenders in this online market respond to signals of characteristics such as race, age, and gender that are conveyed via pictures and text. We find evidence of significant racial disparities; loan listings with blacks in the attached picture are 25 to 35 percent less likely to receive funding than those of whites with similar credit profiles. Conditional on receiving a loan, the interest rate paid by blacks is 60 to 80 basis points higher than that paid by comparable whites. Though less significant than the effects for race, we find that the market also discriminates somewhat against the elderly and the overweight, but in favor of women and those that signal military involvement. Despite the higher average interest rates charged to blacks, lenders making such loans earn a lower net return compared to loans made to whites with similar credit profiles because blacks have higher relative default rates. This pattern of net returns is inconsistent with theories of accurate statistical discrimination (equal net returns) or costly taste-based preferences against loaning money to black borrowers (higher net returns for blacks). It is instead consistent with partial taste-based preferences by lenders in favor of blacks over whites or with systematic underestimation by lenders of relative default rates between blacks and whites.
Article
We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace - Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex-post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets.
Article
I find that beauty, race, age, and personal characteristics affect lenders' decisions, once credit and employment history, homeownership, and other hard financial information are taken into account. Beautiful applicants have 1.59% higher probability of getting loans, pay 60bps less, but have similar default rates than average looking borrowers who get worse terms. Blacks are less likely to get loans, pay higher rates than similar Whites, but default more. The findings are consistent with taste-based discrimination/misperception against the ugly, and with statistical discrimination against Blacks, although lenders specialization in borrowers from the same ethnicity and racial prejudice also play a role.
Article
I find that beauty, race, age, and personal characteristics affect lenders' decisions, once credit and employment history, homeownership, and other hard financial information are taken into account. Beautiful applicants have 1.59% higher probability of getting loans, pay 60bps less, but have similar default rates than average looking borrowers who get worse terms. Blacks are less likely to get loans, pay higher rates than similar Whites, but default more. The findings are consistent with taste-based discrimination/misperception against the ugly, and with statistical discrimination against Blacks, although lenders specialization in borrowers from the same ethnicity and racial prejudice also play a role.
Article
This paper shows that a seller can benefit from “strategic demarketing, ” a practice that purposely suppresses marketing efforts to discourage demand even if such efforts are costless. By modestly marketing a product, the seller reduces sales ex ante but improves its quality image ex post, as buyers attribute any lackluster sales to insufficient marketing rather than low quality. The findings shed new light on classic marketing problems such as advertising scheduling and market selection. Key words: demarketing; observational learning; quality inferences.
Article
Consumers’ purchase decisions can be influenced by others’ opinions, i.e., word-of-mouth (WOM), and/or others’ actions, i.e., observational learning. While information technologies are creating increasing opportunities for firms to facilitate/manage these two types of social interaction, researchers so far have encountered difficulty in disentangling their competing effects and have provided limited insights into how these two social influences may differ from and interact with each other. Based on a unique natural experimental setting resulting from information policy shifts at the online seller Amazon.com, we design three longitudinal, quasi-experimental field studies to examine three issues regarding the two types of social interaction: (1) their differential impact on product sales, (2) their lifetime effects, and (3) their interaction effects. An intriguing finding is that, while negative WOM is more influential than positive WOM, positive observational learning information significantly increases sales but negative observational learning information has no effect. This suggests that reporting consumer purchase statistics can help mass-market products without hurting niche products. Our results also reveal that the sales impact of observational learning increases with WOM volume.
Article
Although consumers increasingly use online communities for various activities, little is known regarding how participation in them affects individuals’ decision making strategies. Through a series of field and laboratory studies, we demonstrate that participation in an online community increases risk seeking tendency of individuals in financial decisions and behaviors. Our results reveal that participation in an online community leads consumers to perceive support from other members, that is they believe they will be helped by other community members should difficulties arise. Such a perception leads online community members to make riskier financial decisions than non-participants. We also discover a boundary condition to the effect: online community members are more risk seeking only when they have relatively strong ties with other members; when ties are weak, they exhibit similar risk preferences as non-members.
Article
In ‘experience-weighted attraction’ (EWA) learning, strategies have attractions that reflect initial predispositions, are updated based on payoff experience, and determine choice probabilities according to some rule (e.g., logit). A key feature is a parameter δ that weights the strength of hypothetical reinforcement of strategies that were not chosen according to the payoff they would have yielded, relative to reinforcement of chosen strategies according to received payoffs. The other key features are two discount rates, φ and ρ, which separately discount previous attractions, and an experience weight. EWA includes reinforcement learning and weighted fictitious play (belief learning) as special cases, and hybridizes their key elements. When δ= 0 and ρ= 0, cumulative choice reinforcement results. When δ= 1 and ρ=φ, levels of reinforcement of strategies are exactly the same as expected payoffs given weighted fictitious play beliefs. Using three sets of experimental data, parameter estimates of the model were calibrated on part of the data and used to predict a holdout sample. Estimates of δ are generally around .50, φ around .8 − 1, and ρ varies from 0 to φ. Reinforcement and belief-learning special cases are generally rejected in favor of EWA, though belief models do better in some constant-sum games. EWA is able to combine the best features of previous approaches, allowing attractions to begin and grow flexibly as choice reinforcement does, but reinforcing unchosen strategies substantially as belief-based models implicitly do.
Article
Applications of random utility models to scanner data have been widely presented in marketing for the last 20 years. One particular problem with these applications is that they have ignored possible correlations between the independent variables in the deterministic component of utility (price, promotion, etc.) and the stochastic component or error term. In fact, marketing-mix variables, such as price, not only affect brand purchasing probabilities but are themselves endogenously set by marketing managers. This work tests whether these endogeneity problems are important enough to warrant consideration when estimating random utility models with scanner panel data. Our results show that not accounting for endogeneity may result in a substantial bias in the parameter estimates.
Article
We investigate the effect of house price changes on divorce using data for 1991-2010 from the Current Population Survey and the Federal Housing Finance Agency. Our findings suggest that changing house prices significantly affect the share of a cohort that is divorced, and that these effects are asymmetric with respect to housing gains versus losses. In addition, we find differential effects for groups that are more likely to be homeowners versus renters. Some of this evidence is consistent with homeowners being locked into their homes--and hence marriages--by increased transactions costs in down markets.
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This paper studies distribution-free estimation of some multiplicative unobserved components panel data models. One class of estimators requires only specification of the conditional mean; in particular, the multinomial quasi-conditional maximum likelihood estimator is shown to be consistent when only the conditional mean in the unobserved effects model is correctly specified. Additional orthogonality conditions can be used in a method of moments framework. A second class of problems specifies the conditional mean, conditional variances, and conditional covariances. Using the notion of a conditional linear predictor, it is shown that specification of conditional second moments implies further orthogonality conditions in the observable data that can be exploited for efficiency gains. This has applications to both count and gamma-type panel data regression models.
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The magnitude of the interaction effect in nonlinear models does not equal the marginal effect of the interaction term, can be of opposite sign, and its statistical significance is not calculated by standard software. We present the correct way to estimate the magnitude and standard errors of the interaction effect in nonlinear models.
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We document that eBay bidders exhibit a biased preference for auctions with more bids, even if these are non-diagnostic of quality, creating an incentive for sellers to lower starting prices to attract early bids. We find that lowering starting prices succeeds in increasing the likelihood that an auction will receive additional bids, conditioning on its current price. We also find that, conditioning on dollar amount bid by bidders, those who engage in non-rational herding are less likely to win, and when they do win they pay higher prices. Supporting the premise that this is a mistake, experience reduces dramatically the tendency to engage in non-rational herding. Remarkably, the seller side of the market is in equilibrium: a high enough share of sellers chooses low starting prices for expected revenues to be identical for high and low starting prices. In sum, market forces in eBay eliminate the rents associated with exploiting the behavioral bias we identify, but not the bias itself.
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This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.