EXPERTS VS. NONEXPERTS IN ONLINE CROWDFUNDING MARKETS

The growth of crowdfunding markets that include both expert and nonexpert investors will soon accelerate due to recent changes in Securities Exchange Commission (SEC) regulations. Prior work has suggested that nonexperts (1) may benefit from experts' participation via mimicking their trades, but (2) will also face a cost, as experts crowding nonexperts out of the best opportunities will ensure that nonexperts will suffer lower returns than experts. Traditional economic theory holds that the crowding effect means that the relative importance of nonexperts in the market will decline over time until they become unimportant. Exploiting a unique period in one crowdfunding market (Prosper.com) that allowed us to directly estimate the net cost of competing with better-informed experts, we found that the net negative effects of expert participation on nonexperts are small. We used simulations to both better understand (1) the market characteristics and crowdfunding platform choices that influence experts' and nonexperts' returns, their return gap, and the extent to which nonexperts are better or worse off relative to a market without expert participation, and (2) the factors that may contribute to the small expert/nonexpert Prosper return gap.