Background
The article “Donation-based crowdfunding with refund bonuses” by Timothy N. Casson and Robertas Zubrickas was published in the European Economic Review journal in 2019. It is concerned with improving the crowdfunding model as an alternative for public projects, with the proposed solution being increased refunds to individuals who have donated to the projects. This is done as a precaution in case the project does not proceed and does not secure the necessary funds for its launch. The authors argue that crowdfunding is, by definition, more efficient and responsive to community control than government-funded public projects (Casson & Zubrickas, 2019). The proposed refunds are to be made by taxing projects that have overshot their mark, by imposing a modest fee.
Experimental Design and Key Findings
The article explores several options available to customers through an experimental simulation study. The three options provided include refunds of 0%, 10%, and 20% in addition to the initial contribution, with additional factors including whether the funding goes to one or several projects, from which customers can or cannot choose. It was expected that the 20% extra refund on specific projects would yield better outcomes compared to a 0% refunding strategy (Casson & Zubrickas, 2019). Likewise, it was expected that the 0% strategy would have a higher number of free riders, as they could contribute smaller sums and still enjoy the products created.
The study’s results were only partially as expected. As it turned out, a 10% refund rate showed better performance than a 20% rate in some areas, and a 0% contribution performed better than expected, although it fell behind refunds anyway. The assumption that the 0% group would have more free riders than the normal group was accurate (Casson & Zubrickas, 2019). Nevertheless, the experiment was considered a success in demonstrating the key points of crowdfunding behavior in individuals.
Analysis and Implications of the Refund Model
The first point, as presented by Casson and Zubrickas (2019), is that people are more incentivized to crowdfund projects that promise gains if they do not meet the required targets. The nature of crowdfunding psychology suggests that it demonstrates to people that the project is trustworthy, which in turn generates more donors and allows for covering up the slim few projects that do not meet the target funding (Mochkabadi & Volkmann, 2020). In that regard, a refund increase is an effective tool to increase the number of people willing to supply public projects.
At the same time, the 20% refund performed less effectively than expected, often yielding lower results than the 10% refund strategy. The reasons for this could be that people perceive it as too good a deal to pass up (Casson & Zubrickas, 2019). Alternatively, they suspect that money taken from successful projects to provide refunds to others is a scam and cannot be economically sustainable.
Finally, the authors point out that the performance of the 0% strategy was better than expected, as this is how the traditional crowdfunding model typically works, and it is the one with which they are most familiar. Moreover, some people donate small sums to become free-riders, essentially relying on big donors for project success (Casson & Zubrickas, 2019). Overall, they state that the refund initiative is a step forward in popularizing crowdfunding as a type of incentive and will lead to more people being engaged in these practices. As a result, crowdfunding can become a genuine alternative to traditional public projects, leading to increased efficiency and accountability across the board.
Reference List
Cason, T. N. and Zubrickas, R. (2019). ‘Donation-based crowdfunding with refund bonuses’, European Economics Review, 119, pp. 452-471.
Mochkabadi, K., and Volkmann, C. K. (2020). ‘Equity crowdfunding: a systematic review of the literature’, Small Business Economics, 54(1), pp. 75-118.