Fund What You Trust? Social Capital and Moral Hazard in Crowdfunding

Abstract

We study whether social capital mitigates moral hazard in crowdfunding. We construct a yearly index of social capital for all U.S. counties and combine it with a near-comprehensive sample of Kickstarter campaigns. Our results show a strong positive correlation between the social capital of the entrepreneur’s home county and the campaign performance. For identification, we exploit a quasi-experiment based on a Kickstarter rule change that helps reduce the magnitude of moral hazard. We find that this rule change is associated with a significant reduction in the effect of social capital on campaign outcomes. In addition, the results are stronger for campaigns that are more vulnerable to moral hazard – as proxied by entrepreneur, regional, and campaign characteristics – and in times of high economic uncertainty and low sentiment. Overall, our findings suggest that crowdfunding campaigns benefit from social capital via the alleviation of moral hazard concerns.