Alex Tabarok suggests improving crowdfunding by letting fundraisers offer a bonus as compensation for anyone that gets a refund if the project fails. By doing that the fundraiser solves the coordination problem making non-funding the equilibrium:

if I think that you won’t contribute then I may decide not to contribute and if I don’t contribute then you may decide not to contribute. Neither of us can do better by contributing, given the other person is not-contributing, and so non-contributing is a Nash equilibrium

But with refund bonuses:

if I think that you won’t contribute then I want to contribute, to earn the refund bonus, and the same is true for you. Indeed, the only equilibria in the crowdfunding game with refund bonuses have the project being funded.

He also highlights the importance of early backing to successfully fund projects, and refund bonuses, and especially refund bonuses only for early backers, incentivize early backing.

This is supported by a lab experiment (sci-hub) that tested various refund bonus schemes against the no-refunds baseline using a "lab-based fundraising platform with many main features of real-life crowdfunding such as asynchronous multiple contribution pledges over continuous time, constant updating of individual and aggregate pledge amounts until a fixed deadline, and simultaneously launched multiple fundraising campaigns. Each campaign lasts for two minutes, during which ten participating subjects can pledge their (multiple) contributions without any timing restrictions" where for each project, each participant is assigned a random value between 20 and 100 experimental dollars[1], which they get if the project is funded. The funding threshold for each project was set at 300 (experimental) dollars. For each project, participants could make as many contributions of any amount they want, which would instantly display for all other 9 participants. "In every period two alternative projects were available for potential contributions, with differing refund bonus rules for each". Sessions included 20-30 periods. Overall, data was reported from 280 college students, non of which participated in more than one session.

The results were:

Baseline: no refund bonus (on Kickstarter the funding frequency is 39.5%)
F3: bonus of $3 for total individual contribution ≥ $30.
F6: bonus of $6 for total individual contribution ≥ $30.
FE30: bonus of $6 for first 5 individuals with total individual contribution ≥ $30.
FE50: bonus of $6 for first 5 individuals with total individual contribution ≥ $50.
PE10: 10% bonus paid on contributions made during the first half of the contribution window.
P20 (not shown): 20% bonus on all contributions - 60.5% funding frequency.
PE20: 20% bonus paid on contributions made during the first half of the contribution window.

I think this is a great idea and I expect it to work if implemented. I hope to see crowdfunding platforms experiment with it.

With that said, there are some interesting possibilities to explore regarding this suggestion.

Why fundraisers have to fund the refund bonus (and not the platform)

If the platform funded the bonuses, people could create on purpose projects that would fail and back them in order to profit from the refund bonuses. There's no such option if the fundraiser funds the bonuses.

Cost and Optionality

Putting the burden of funding the bonuses on the fundraiser makes fundraising more expensive, but not that much more expansive. Say you make a campaign with a $100,000 goal, and choose PE10 (10% bonus paid on contributions made during the first half of the contribution window). The most you'd have to pay is 10% of $99,999, but that's unlikely to happen. If your campaign fails I expect it's more likely to end up at about half the funding goal. In that case you'd only have to pay $5000 in bonuses. If we take into account that much of the support comes after the midpoint of the campaign, we can cut that amount further by a half or a third, to $3400-$2500. This seems far more manageable, and maybe you get most of the benefit even with lower bonuses and a shorter timeframe, this hasn't been tested so we don't know yet.

On top of that, the paper shows that fundraisers that do multiple fundraisers can pay for the bonuses in their failed projects with the profits from their successful project (which, remember, they have about 11% more of using PE10 refund bonuses and 52% more using PE20).

Still, I think this should be optional (and judging from the wording in the paper I think the authors agree), so those who don't want to take any risk wouldn't offer refunds and would have a lower chance of succeeding, while those who are willing to take the risk would offer refunds and have a higher chance of succeeding. I also think multiple refund schemes should be available, so fundraisers could choose the one that fits them most.

I also wonder if this will lead to some sort of two-step process that would let fundraisers crowdfund the funds for the refund bonuses and then do the main campaign with the crowdfunded refund bonuses.

Higher Goals

Here's how I understand regular crowdfunding dynamics[2]: whether a person chooses to support or not is a function how likely they think it is to succeed and how likely they think it is that they can free-ride. So if the project asks for very little, it's likely someone else will back the project instead of them so they refrain. If the project asks for too much, it's unlikely it will get funded so there's no point pledging anything. And there's a range in the middle where that person both thinks it's likely the project will get funded and unlikely they can free-ride, in which case they back it.

Refund bonuses completely change this dynamic, cause now the higher the goal (and the less likely a project is to get funded) the more you want to back it!

So if campaigns of all goal amounts get funded more frequently, and if there's an incentive to back projects that have seemingly too high goals, then I think this allows projects to successfully ask for much more.

This is especially true for big companies that do many fundraisers and can finance high refund bonuses for the failed ones with the profits from the successful ones.

As far as I can tell, the projects that asked for the highest amount on Kickstarter and succeeded are Mystery Science Theater 3000 ($5.5m) and Torment: Tides of Numenera ($4.5m). How much higher could you go with refunds?

This is especially exciting for me because I'm interested in the possibility of funding intellectual goods with crowdfunding instead of intellectual property.

Disincentivizing Promotion

Fundraisers usually depend on backers sharing and promoting the project to get more backers onboard. The refund bonus is technically a disincentive to promote the project. If previously you would 'lose' X utility for the project failing, because you want it to succeed, now you lose X - Y where Y is the refund bonus you would get if it fails. So the refund bonus should never be so high that it makes someone prefer the project to fail or to make them demotivated to promote it. The project succeeding should still clearly trump the project failing in the eyes of backers.

A high enough refund bonus can create weird behaviors like backing the project, and then trying to convince others that it's awful or that its creators are awful and shouldn't be supported in order to gain the refund bonuses.

I think this suggests that optimal refund bonuses are actually fairly cheap, and wouldn't be a problem for most fundraisers. Even rich fundraisers who are confidant in their product might not want to offer a big refund bonus because of that.

Still, unless the refund bonus is very high or the value of the project is very low, I don't expect this to be a problem.

Harmful Projects

Until now we only considered projects that are beneficial to society (or at least to the backers), but some projects can be harmful. Maybe they're trying to fund some addictive game, propaganda, or some dangerous technology. 

Without a refund bonus no one wants to back a harmful project. With refund bonuses people have an incentive to be early backers of harmful projects if they think they won't achieve full backing (but it still doesn't incentivize late backers to push it over the edge. That might still happen by accident, though). People will probably even do that as a deliberate attempt to punish the fundraiser for trying to raise for a bad project.

Creators of such projects are disincentivized to use refund bonuses, as they're very likely to have to pay them. In most cases they'll either not use refunds, or use them and be punished for it. This leads to another interesting dynamic, as the paper points out "Since refund bonuses are riskier for less socially valuable campaigns, the use of refund bonuses could signal more socially valuable campaigns".

I don't know how much likelier to be funded would bad projects be, but my hunch is that it doesn't make them more likely, and if it does then only by a little, which would be worth it given the huge increase in the amount of good projects that get funded. But to guard against it, we can stick to early backer refund schemes (which seem better anyway), that would prevent the hypothetical scenario where 'fake' backers accidentally get it too close to the finish line and then others push it over. This also might be another reason to limit bonus sizes, but that seems less important than only refunding early backers.

Still, even just partial backing that doesn't push bad projects over the finish line can have an effect. Most people, including enough journalists and famous people, won't understand all these dynamics, and when they see a terrible project getting backed they will treat it like a regular fundraiser. 

Expect articles like "Make free money by backing this horrible Fundraiser!", Followed by articles like "Terrible fundraiser asking for $10m receives $9m dollars. What does this say about our society?", that don't understand that what this means about our society is there's a consensus that it's a terrible idea that no one wants to fund.


I think this is a great idea that can have a very big positive impact. It also has some extra effects that aren't obvious at first glance. It seems the best policy, both to maximize the funding frequency of beneficial projects and to decrease possible negative side effects of the system, is to offer refunds only for early backers, and perhaps also limit the bonus size. I hope to see crowdfunding platforms experiment with this idea.

Thanks MakoYass for the post that brought this to my attention.

  1. ^

    "these are converted to U.S. dollars at a pre-announced 50-to-1 conversion rate. Subjects are paid for all project rounds and also received a US$5.00 fixed participation payment, and their total earnings averaged US$26.25 each."

  2. ^

    Assuming a backer who wants the project to succeed, and ignoring backer rewards

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Possible modifications:

  • Allow withdrawing funds at any point. People like to feel in control, and this setup eliminates the need for the fundraiser to have a deadline.

  • For longer-term projects, let funds accumulate interest at slightly below market rates. The difference is pocketed by the crowdfunding platform. Customers get to feel financially smart while also contributing to a cool idea.

Yep, it's important to allow the canceling/changing of pledges, Kickstarter already allows that until the last 24 hours of the campaign where you can only cancel/change your pledge if it doesn't make the project go below funding level. How do you do refunds without a deadline though?

Can you explain the second Idea a bit more? I don't think I understand it.

The platform invests the funds at market rate, collects a small percentage of the interest, and pays the rest as dividends to the backers in proportion to their contribution.

Hmm... that requires the backer to actually give the money to the platform the moment they make a pledge, even if the project isn't yet fully backed, instead of how it's usually done now, where if at the deadline the project is fully backed, the platform charges everyone, and otherwise no one ever gets charged. 


If you're allowed to cancel a pledge at any point, there's really very little reason not to just fund anything with a refund bonus the moment it posts, aiming to cancel your pledge if it looks like it might succeed.


Some thoughts:


#1: If a project is almost funded, a creator can contribute money themselves (or e.g. indirectly via a friend).  The example above said that if you offered a 10% refund on a $100k project:

The most you'd have to pay is 10% of $99,999

but in practice if you raised $95,000, rather than pay back $9,500 in bounties and have the project fail you'll probably just kick in $5k of your own money to make the project succeed.  Platforms can try to forbid this, but it's probably going to be quite hard to do so.


#2:  If nobody or nearly nobody wants a thing being crowdfunded (not 'this is actively harmful', just 'there is no demand for this'), the equilibrium in the presence of a refund bonus is for there to still be a chance of it being funded, sufficient that opportunistic fishing for refund bonuses breaks even on net.  

If I offer a 10% refund bonus, it is worth people's money to bet on me failing so long as there is a <10% chance of me successfully funding.  

In equilibrum, therefore, enough people fund this project that there's a ~10% chance of it happening even though no-one wants it.  (This probably takes the form of the project being almost funded in the first half of the window, such that traders expect a small but not quite zero chance of enough genuine users coming along to finish it/bring it in range for the creator to finish it.)

One note is that you did the math about the costs based on PE10 (which gave an extra 11% chance of success) but calculated the benefits based on PE20 (which gave an extra 53% chance of success). 

Yes, you're right, thanks. Is it fixed now?

I initially wrote that part based on the chart in the original post, but later found it has a discrepancy with the paper, and that the paper is right. So I went and fixed the text and but missed that one.

It looks correct now, thanks!

For further complication, what if you consider potential backers having different estimations of the value of the project?

That would raise the risk of backing-for-the-bonus projects that you don't like. Maybe you would back the project to punch cute puppies to 5% or 25%, but if it's at 75% you start to suspect that there are enough cute puppy haters out there to push it all the way if you get greedy for the bonus.

For good projects, you could have a source for the refund bonuses other than the platform or the project organizers - the most devoted fans. Allow backers to submit a pledge that, if the project is refunded, gets distributed to other backers rather than the person who submitted it.

Allow backers to submit a pledge that, if the project is refunded, gets distributed to other backers rather than the person who submitted it.

Oh, and maybe instead of knowing from the start what the refund would be (10%, 20%, some fixed amount...), you would proportionally distribute these funds between all other backers, and you can even have a counter that shows how much money is in the refund pool. That would be a very interesting refund scheme to test.

I'd be happy to see an experiment that simulates a more realistic scenario, with projects that have different goals, projects that have negative value, option for participants to "promote" projects, and also something like this refund scheme. Of course, an actual crowdfunding platform experimenting with this would be better, but this would still be a valuable experiment.

I have a pretty deep suspicion of gimmicks, kickbacks, and gamification for this type of financial decision.  This seems like a clever way to make things complicated, and reward those who put extra effort into identifying marginal projects.  For a somewhat greater chance of success of projects on the edge of viability, but at significantly increased risk to the actual recipients of funding - they now LOSE money if unfunded, rather than just failing to get any.

It doesn't seem to actually add any information or remove an undue friction.  It just makes fundraising more expensive for projects that aren't super-likely to meet their threshold.

I'd love to hear some specific fundraisers that you'd recommend use this mechanism - a pointer to any open crowdfunding project that you think would benefit from this mechanism.  I can't think of any.  

I think it's great to give more options to fundraisers - it's an interesting idea even if I can't name the fundraiser I'd recommend putting up a 10% deposit that they'll lose if they fail their funding.  I predict it won't change the landscape much, but I'll be happy to be proven wrong.  Ok, not so happy if it turns out that it's very effective, but only for crappy, scammy fundraising.  

I wonder if my model of contributors is different from yours (or the true distribution of participants).  I think that the object-level expectation of where the money will go is the primary motivator, not a financial reward for correctly predicting success of the funding.

I went to Kickstarter and looked at upcoming campaigns (campaigns that are already planned but haven't started gathering funds yet) to look for projects that seem especially fitting to use this model. Here's four:

  • The Dark Quarter:  "A cooperative narrative game exploring The Dark Quarter of 1980s New Orleans". It's by a company that has already run 10 Kickstarters. By using this model they can have more fundraisers succeed at the cost of paying refund bonuses on the few that fail. It definitely seems that they would have the money to invest in that if they wanted to.
  • CheerTok: All-in-one Pocket Touchpad for Any Smart Devices: A product that seems to have already had some success (it says "reddot winner 2022", and I'm guessing it's some product competition), investing in a successful kickstarter seems definitely worth it.
  • Mictlan: The Video Game: This is by a studio that hasn't yet run any kickstarters, but it seems that the product already had a lot invested in it, making another small investment to make the kickstarter more likely to succeed seem worth it.
  • HOLO12 - The New Awesome Education Platform: "the new standard in Digital Learning. Featuring Augmented Reality and Next-Generation Science and Math Courses.". The creator is "passionate about digital technologies, that create positive user experiences through good design and the smart implementation of practical technologies." and has "Extensive international experience having worked in Silicon Valley, London and Dublin with brands like Rolex, Boeing, GE and the ESA.". This seems like a project that's very important to its creator, where the creator likely has the extra money and would be happy to invest it if it meant a higher chance the project would succeed.

There were others, of course. I picked a few that both seemed very fitting and showed a range of situations and reasons. Most projects there seemed to me like they would work for this new system. Though for the sake of completeness I did also look for projects that seemed unfit to me, and found these two, which seem more on the personal side, where the creator might not be interested/capable of taking risk for them.

Neat - do you know if any of them are actually considering this mechanism?  I'd be curious to know whether their reasons align with mine, or if it's "we'd love this, but the additional friction of tracking it ourselves rather than platform support makes it just a bit too difficult".

It also has me thinking - there's no reason it couldn't be funded by supporters rather than the seeker of funding.  Same benefits (more likely to go), same costs (loss rather than neutral if unfunded).  Early supporters could specify "want the bonus if unfunded", "just want refund if unfunded", or "encourage funding by making my pledge non-refundable".   

Which is another step along the way to just having a general prediction market on whether it'll be funded.  Allow hedging and side-betting by anyone.  This STILL encourages full funding, as the best way to manipulate the market is in the positive direction: pledge.

I'd be surprised if they've even heard about it, so I don't think so, but I don't actually know (I don't know anything about the projects or the creators except the little they wrote there).

Yep, letting backers fund the refund bonuses would also be great. I'd love to see an experiment (either in a lab or in a real crowdfunding platform) try that.

What are the barriers to platforms offering the option?  I suspect there's limited value in artificial experiments - the interaction of different motivations and estimates of success for real projects and real funders is likely to be too varied to control for.  

Naively, it would seem cheap for a platform to offer it to fund-seekers, and running code trumps all of our theoretical arguments.

I honestly don't see any barriers. Either they simply don't know about it, or maybe they think that feature is too complex or somehow not worth it, or they have reasons I haven't thought of. If anyone knows I expect it would be Alex Tabarrok, cause any company interested in that would have likely contacted him. Otherwise, it might be a good idea to contact crowdfunding platforms and ask them about it.

[Edit 30/aug/2023]: The barrier is probably legal. Offering a refund bonus is like offering a security, so it would be subject to equity crowdfunding regulations (probably, I'm not a lawyer).  

When I made this post, I didn't talk about the legal side of this, because I didn't know there was a legal problem with doing this. 

But then I saw this comment, and also discussed this with a friend, and found out that this would count as selling securities, and would be illegal, which explains why no crowdfunding platform did it.

And then today I looked into Angel Studios, and specifically, Angel Funding, and found out that they're doing crowdfunding with investment legally (SEC regulation and all)! So if this is legal, perhaps it's possible to do refund bonuses legally as well, if you do all the necessary work and jump through the necessary hoops.

It also shows the potential of investment crowdfunding. If we look at their movie David, which is currently gathering funds, there's 11,238 people Investing $52,431,109. On average, that's $4665.5, which is 1-2 orders of magnitude higher than regular crowdfunding. For reference, if all 185,341 backers on Brandon Sanderson's Kickstarter project (which is the most funded project ever, currently) pledged this amount, it would raise $864,708,435!

I think refund bonuses don't have the potential to get projects to these funding levels, because they're not nearly as good as investments as what Angel offers. But I think it does give some reference. Though Angel isn't fit for refund bonuses because their campaigns aren't all-or-nothing (they get all the money invested even if they don't reach the goal), I think if you do an all or nothing campaign you can combine the two models, and that would make for a really explosive campaign.

If someone knows more about the legal side of this I would love to hear more, cause I barely know how this all works.