Sequential Fundraising and Mutual Insurance

TL;DR

This paper analyzes sequential fundraising and voting, revealing how mutual insurance and delegation strategies influence decision-making dynamics and outcomes in these processes.

Contribution

It introduces the concepts of mutual insurance and delegation in sequential decision models, highlighting their impact on fundraising and voting behaviors.

Findings

Participants rely on mutual insurance, investing despite unfavorable information.

Delegation occurs when early contributors empower later ones to decide.

Dynamics resemble but differ from classic information cascade models.

Abstract

Seed fundraising for ventures often takes place by sequentially approaching potential contributors, who make observable decisions. The fundraising succeeds when a target number of investments is reached. Though resembling classic information cascades models, its behavior is radically different, exhibiting surprising complexities. Assuming a common distribution for contributors' levels of information, we show that participants rely on {\em mutual insurance}, i.e., invest despite unfavorable information, trusting future player strategies to protect them from loss. {\em Delegation} occurs when contributors invest unconditionally, empowering the decision to future players. Often, all early contributors delegate, in effect empowering the last few contributors to decide the outcome. Similar dynamics hold in sequential voting, as in voting in committees.