Crowdfunding websites like Kickstarter, IndieGoGo, and Spot.Us are becoming increasingly common methods for people to raise money for projects. Kickstarter has helped people raise over $800 million already, and Donors Choose has raised more than $90 million for low income school children. People raise money on crowdfunding sites by posting projects. Most projects require more than one donation to meet their goal, and some projects receive donations but never reach their goal. Donors need to coordinate to make their donations most effective; your money has more effect if you donate to a project you only partially care about but others are donating to, than if you are the only contributor to a project you really care about.
Using an economics-style lab experiment, we simulated two crowdfunding websites: one uses an all-or-nothing approach we call the the return rule: projects that don’t meet their goal return all donations to donors. The other uses direct donation: projects keep all donations they receive, whether or not they meet their goal. By comparing donor behavior on these two simulated websites, we can understand how this technical rule affects how donors coordinate.
We found that:
- Donors contribute more money to more projects under the return rule
- Under the return rule, donors didn’t coordinate; they donated primarily based on their individual preferences
- Overall, both sites funded almost the same number of projects. Most of the extra donations went to projects that didn’t get funded
- Donors learned to coordinate on low-risk projects under the direct donation model.
Returning donations to incomplete projects is a mixed blessing: it makes donors contribute more money, but it reduces the coordination needed to fully fund projects and leads to fewer donations actually being used for projects.
This research also demonstrates that the risk associated with failure in an online peer-production project can serve as a useful coordination mechanism. If a project fails, it fails for everyone who has contributed or has an interest in the project, and eliminating this shared risk can remove the incentive for people to collaborate.
For more, see our full paper, Coordinating Donors on Crowdfunding Websites.