Quality Signaling in Rewards-Based Crowdfunding: The Role of Deferred Payments

Problem definition: The rise of crowdfunding hides a flaw: creators’ private information that is unobservable enables them to exploit backers, stalling the sector. To shield backers, platforms now escrow part of raised funds as deferred-payment insurance. We explore whether the implementation of deferred payment (DePay) shapes quality signaling under private information and how to utilize DePay for better campaign outcomes. Methodology/results: We build a stylized signaling game with a representative creator. In current practice, DePay is mandatory, and the creator can only signal quality by raising the funding target (instrument T) or cutting the reward price (instrument P). We instead propose to let DePay be voluntary: the creator decides whether to adopt it and even how large a share to defer, thereby creating a novel signaling instrument D. In the “all-or-nothing” funding, the implementation of DePay guarantees a separating equilibrium, and any of T, P, or D may be effective. Contrary to the literature that crowns T as the unique optimal instrument, we show that (i) P dominates T when the platform sets a low reserve ratio under DePay, and (ii) D outperforms both T and P when the creator determines the reserve ratio, yielding a win-win for backers and the creator. In the “keep-it-all” funding, DePay is indispensable for a (preferred) separating equilibrium because T collapses; nevertheless, voluntary DePay does not always outperform mandatory DePay. Managerial implications: Our results support the implementation of suitably designed DePay by crowdfunding platforms to protect backers, specifying when DePay should be mandatory or voluntary. We also illustrate how creators leverage DePay to signal quality, offering guidance for their campaign design. Funding: J. Lyu acknowledges financial support from the Natural Science Foundation of China [Grant 72401270] and the Fundamental Research Funds for the Central Universities [Grant WK2040000098]. X. Shen acknowledges financial support from the Natural Science Foundation of China [Grants 72222015, 72571260, 72171215]. The research of X. Kong is supported by the Natural Science Foundation of China [Grants 72471213 and 72101243] and the USTC Research Funds of the Double First-Class Initiative [Grant YD2040002025]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0402 .