Crowdfunding, a new avenue for entrepreneurs to finance their early-stage projects, is gaining widespread attention. Working with colleagues, HKUST’s Chao Tang and Xin Wang shed light on a hitherto unexplored dimension of this funding model, with implications for regulators and investors alike.

“Using the Internet,” the authors explain, “entrepreneurs can extend their reach to the general public (the so-called ‘crowd’), making it much easier to finance new ideas and technologies.” As this approach becomes more popular, regulators are pushing for greater transparency to protect investors and reduce information asymmetry in the crowdfunding market.

Yet an important gap remains in research on this topic, given the difference between traditional investment and crowdfunding. Traditional investors largely seek monetary returns, whereas crowdfunding investors are driven by their enthusiasm for innovation and the new products funded. “While the literature has examined the role of transparency in the traditional financial market,” say the researchers, “it is unclear whether one can directly apply these lessons to the new and different crowdfunding market.”

To fill this gap, they analysed a setting in which an entrepreneur seeks funds to launch an innovative project in a crowdfunding market. Their model yielded instructive and sometimes surprising findings. “The crowdfunding market features an underimplementation inefficiency,” they report, “driven by two types of uncertainty that consumers face.” These are fundamental uncertainty about implementation costs and strategic uncertainty due to potential coordination failures among consumers.

Unexpectedly, when both types of uncertainty exist, eliminating fundamental uncertainty by making implementation costs more transparent does not increase efficiency—in fact, the reverse is true. Although greater transparency makes consumers more informed about new products, it also hinders the development of new products and prevents consumers from obtaining them. “Our findings send a message of caution against promoting greater transparency in the crowdfunding market,” the authors warn.