Attracting Investors

Published on January 25, 2021

Research by Dean Paul A. Pavlou Looks at Implications of Attracting Investors via Lottery

Crowdfunding projects in North America generate almost $20 billion per year and are projected to continue to grow. But fewer than a quarter of all crowdfunding projects end up being successful (reach their funding goal), revealing a need for more research into the factors that lead to their success.

A study by Dean and Cullen Distinguished Chair Professor Paul A. Pavlou of the C. T. Bauer College of Business offers insight into the implications of initiating a lottery to attract investors to crowdfunding projects, a relatively new promotional tool in crowdfunding platforms.

“On the Use of Probabilistic Uncertain Rewards on Crowdfunding Platforms: The Case of the Lottery,” published in the top-tier journal Information Systems Research (ISR) with Pavlou’s colleagues Jing Gong (Lehigh University) and Zuyin Zheng (Temple University), is based on large-scale data from one of the largest reward-based crowdfunding platforms in China who was among the first to initiate the lottery as a novel approach to crowdfunding.

Pavlou and his colleagues proposed several important insights for crowdfunding fundraisers:

  • Although the lottery does help to attract a higher number of backers on crowdfunding projects, the lottery surprisingly also reduces the total money raised by the project—and thus the probability of reaching its funding goal.
  • The lottery incentivizes individuals who would otherwise not fund the project to become (small) lottery backers, cannibalizing regular prospective rewardees and donors by encouraging them to opt for the (cheaper) lottery option.
  • An individual backer-level analysis shows that the lottery has a larger impact on those backers who have prior tendencies to be donors, rather than rewardees. This explains why more donors end up purchasing the lottery, thus reducing their donation amount.

“Our study theoretically contributes to three streams of literature—crowdfunding, decision making under uncertainty, and the lottery,” Pavlou said. “From a practical standpoint, our study informs fundraisers on how to design strategies to attract the right type of backers and crowdfunding platform owners on how to leverage the lottery as a type of uncertain reward in crowdfunding platforms.”

The results of this study are valuable to crowdfunding platforms around the world when considering to introduce the lottery to attract new investors and increase the success rate of crowdfunding projects on their platforms.

By Julie Bonnin