We develop a model where reward-based crowdfunding enables …rms to obtain a reliable proof of concept early in their production cycle. The information gathered from a subsample of backers through a …xed length pre-selling campaign enables …rms to update their beliefs about the preferences of all future consumers. This creates a valuable real option as …rms invest only if updated demand is high. Further, such updating mitigates moral hazard: the higher the funds raised, the lower the …rms' incentives to divert them. Our results are consistent with stylized facts and provide new testable implications.

This paper focuses on the importance of equity markets in facilitating the exit of entrepreneurs investing in technology. Entrepreneurs' willingness to invest and aggregate output is affected in two opposite ways. First, uncertainty about equity price or lack of market liquidity discourages technology adoption. This can explain slow technology adoption and limited participation by venture capitalists in underdeveloped equity markets. Second, fast adoption is a positive signal to imperfectly informed equity market participants. This provides a rational explanation for overpricing technology stocks and overinvestment in developed markets. Fast adoption is most probable at an intermediate quality of information. (JEL D82, E23, G12, G31, G32, O33)

We develop a model where reward-based crowdfunding enables …rms to obtain a reliable proof of concept early in their production cycle. The information gathered from a subsample of backers through a …xed length pre-selling campaign enables …rms to update their beliefs about the preferences of all future consumers. This creates a valuable real option as …rms invest only if updated demand is high. Further, such updating mitigates moral hazard: the higher the funds raised, the lower the …rms' incentives to divert them. Our results are consistent with stylized facts and provide new testable implications.JEL codes: D80, G30, L14, L26, O30