Managing Reward-based Crowdfunding with Efficiency Invisibility and Quality Misconduct

Efficiency invisibility (EI) and quality misconduct (QM) are common on crowdfunding platforms. To understand how managing EI and QM affects the creator and platform, this paper builds a stylized reward-based crowdfunding model by incorporating information asymmetry regarding creators’ production efficiency and creators’ potential quality deviations after funding. Our main findings are as follows. First, managing EI improves campaign success, total funding, and profitability, yet it may reduce product quality. Second, the impact of managing QM depends on whether EI is managed. Specifically, when EI is managed, managing QM improves crowdfunding outcomes by curbing moral hazard; while when EI is not managed, managing QM may lead to lower product quality and worse campaign performance due to the presence of signaling cost. Finally, from the platform’s perspective, the coexistence of EI and QM generates offsetting effects: leaving EI unmanaged incentivizes high-quality signaling, while forgoing QM management makes product quality independent of signaling costs. This interaction may yield better performance than managing only one dimension. Therefore, when the platform forgoes managing one dimension due to high management costs, it may be optimal to refrain from managing the other, even if doing so is low-cost. These findings offer valuable theoretical and managerial guidance for crowdfunding platforms in designing their governance mechanisms towards EI and QM, and for creators to strategically navigate platform selection.