A Potato Salad with a Lemon Twist: Using Supply-Side Shocks to Study the Impact of Low-Quality Actors on Crowdfunding Platforms

Crowdfunding platforms are open peer-to-peer two-sided markets that enable amateur entrepreneurs to raise money for their ventures. However, such markets are at risk of being flooded with low-quality offerings, a situation that might be detrimental to the success of higher-quality products. We empirically investigate the implications of such situations, referred to as “market of lemons”. We analyze a quasi-natural experiment-an exogenous media shock that occurred on Kickstarter.com. The shock was followed by a sharp increase in the number of campaigns, particularly low-quality ones. These unique conditions enable us to estimate how crowdfunding platforms are affected by the presence of an atypically large number of low quality campaigns, while controlling for temporal trends and seasonal effects. We use two novel identification strategies to show that market of lemons decreases the revenue of successful campaigns. However, campaign quality moderates this effect, such that the performance of the highest-quality campaigns is unaffected.