Unleashing the Crowd: The Effect of Social Networks in Crowdfunding Markets.

The article investigates the significant role of online social networks in influencing crowdfunding markets, specifically analyzing data from Kickstarter and Facebook's Social Connectedness Index (SCI). It identifies two key social network effects on backer funding decisions: peer effects, where investors are more likely to fund projects supported by their social network peers, and social ties, reflecting the strength of connections between backers' locations and project locations. The study finds that peer effects are stronger, especially when peers are influential or projects are riskier, and that platform design changes promoting transparency amplify these effects. Additionally, social ties facilitate the transmission of local economic information, such as unemployment rates, enhancing funding decisions. At the aggregate level, projects launched in counties with higher social proximity to crowdfunding capital and stronger peer support have higher funding success rates, and social proximity helps mitigate the negative impact of natural disasters on crowdfunding activity.