A further result from the same paper is that if the actor posing the proposition can set the payout odds and the threshold in response to the common prior and known info-distribution, …
This is a really cool result, but I’m confused about why it holds. Is the idea something like: the actor themself is uncertain about the value of the project, and the kickstarter also helps them find out whether it’s worth doing, so up-cascades are costly in expectation (they might land themselves having to run some awful project)?
But if is the mechanism, it seems to apply to any rational actor using a kickstarter, as opposed to having anything to do with minimizing down-cascades?
Is the idea something like: the actor themself is uncertain about the value of the project, and the kickstarter also helps them find out whether it’s worth doing
Nope! The paper’s model for this result assumes that the value conditioned on success is known to the proposer, so that the proposer’s only incentive is to maximize their own profits by setting the payout odds and threshold. The (non-obvious to me) result that the paper proves is that this coincidentally minimizes the probability of up-cascades:
A higher decision threshold excludes more DOWN cascades while it is less likely to be reached. We show that the concern about potential DOWN cascades dominates the concern about likelihood to reach the target. To maximize the proceeds, the proponent endogenously sets the target to the smallest number that in equilibrium completely excludes DOWN cascades in the same spirit as Welch (1992), with the caveat that the proponent utilizes both price and target to achieve this. Consequently, with endogenous issuance pricing, there is no DOWN cascade which stops private information aggregation, and good projects are always financed while bad projects are never financed, when the crowd base N becomes very large. In other words, financing efficiency and information aggregation efficiency approaches the first best as N grows bigger, despite the presence of information cascades.
This is a really cool result, but I’m confused about why it holds. Is the idea something like: the actor themself is uncertain about the value of the project, and the kickstarter also helps them find out whether it’s worth doing, so up-cascades are costly in expectation (they might land themselves having to run some awful project)?
But if is the mechanism, it seems to apply to any rational actor using a kickstarter, as opposed to having anything to do with minimizing down-cascades?
Nope! The paper’s model for this result assumes that the value conditioned on success is known to the proposer, so that the proposer’s only incentive is to maximize their own profits by setting the payout odds and threshold. The (non-obvious to me) result that the paper proves is that this coincidentally minimizes the probability of up-cascades: