Towards Internalizing the Externalities of Overfunding – Introducing a 'Tax' on Crowdfunding Platforms

Crowdfunding platforms offer project initiators the opportunity to acquire monetary resources from the Internet crowd and therefore have become a valuable alternative to traditional sources of funding. However, some processes on crowdfunding platforms cause undesirable external effects that influence the funding success of projects. In this context, we focus on the phenomenon of project overfunding. Massively overfunded projects have been discussed to overshadow other crowdfunding projects which in turn receive less money. We propose a taxation mechanism to internalize these overfunding externalities and to improve overall funding results. To evaluate this concept, we develop and deploy a sophisticated agent-based model (ABM). This ABM is based on a multi-attribute decision-making (MADM) approach and is appropriate to simulate the dynamic funding processes of a crowdfunding platform. Our evaluation provides evidence that possible modifications of the crowdfunding mechanisms bear the chance to optimize funding results and to alleviate existing flaws.