Fraudulent Behavior by Entrepreneurs and Borrowers

Abstract

Evidence on fraudulent behavior in crowdfunding is scarce. This does not mean that there is no fraud. Hainz discusses the incentives to engage in fraud in a very simple theoretical model and highlights the role of uncertainty. She shows that the terms of the underlying contract influence the incentives to behave honestly and that a reduction of information asymmetries can help to limit fraud. The fact that we observe hardly any fraud cases may be due to low incentives to detect fraud. Although the costs of gathering information leading to the detection of fraud in crowdfunding might be lower than in the corporate world in general, the benefits might be low as well because many investors participating in a campaign contribute only small amounts and cannot coordinate their efforts to detect fraud. Reviewing the existing evidence on potentially fraudulent behavior by backers, borrowers and entrepreneurs Hainz shows its limitations. She argues that counting fraud cases underestimates the true problem because the incentives to report fraud are limited. The figures on non-deliveries and defaults, however, tend to overestimate the problem as non-fraudulent projects also fail.