Chicken or Egg? 
Asymmetry between Cross-side Network Effects in Crowdfunding Markets

54 Pages Posted: 15 Jul 2019 Last revised: 13 Apr 2022

See all articles by Shengsheng Xiao

Shengsheng Xiao

Shanghai University of Finance and Economics

Yi-Chun (Chad) Ho

George Washington University - School of Business

Hailiang Huang

Shanghai University of Finance and Economics

Zhijie Lin

Tsinghua University - School of Economics and Management

Subhasish Dasgupta

George Washington University

Date Written: April 1, 2022

Abstract

This paper studies platform growth through the lens of network effects. Drawing on the platform literature, we conceptualize network size as an informative signal that shapes potential users’ perceived attractiveness of, and thus their willingness to participate on, a two-sided platform. In the context of lending-based crowdfunding, positive cross-side network effects (CNEs) manifest when growth in the size of investors helps a platform attract more new borrowers, and when growth in the size of borrowers helps the platform get more new investors on board. These two mutually enhancing CNEs, if both exist, give rise to the “chicken or egg” paradox, obscuring whether a crowdfunding market is more investor- or borrower-driven. We collect data on user participation across multiple platforms and fit the data to panel vector autoregression models. We find that the size of past investors is positively correlated with the size of current borrowers, supporting the existence of a positive investor-to-borrower CNE. Nonetheless, the size of past borrowers is found to have no significant correlation with the size of current investors. Together, the results show that the two CNEs are asymmetric, suggesting that it is the investor side that plays a predominant role in driving overall platform growth. We also find that the magnitude of the investor-to-borrower CNE is moderated by nonnetwork factors that signal potential operating risks of the platforms. These findings enhance our understanding of network effects and generate actionable recommendations for platform managers.

Keywords: lending-based crowdfunding; network effects; two-sided market; platform growth; panel VAR

Suggested Citation

Xiao, Shengsheng and Ho, Yi-Chun (Chad) and Huang, Hailiang and Lin, Zhijie and Dasgupta, Subhasish, Chicken or Egg? 
Asymmetry between Cross-side Network Effects in Crowdfunding Markets (April 1, 2022). Available at SSRN: https://ssrn.com/abstract=3419980 or http://dx.doi.org/10.2139/ssrn.3419980

Shengsheng Xiao

Shanghai University of Finance and Economics ( email )

No. 100 Wudong Road
Shanghai, Shanghai 200433
China

Yi-Chun (Chad) Ho

George Washington University - School of Business ( email )

Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/chad-ho

Hailiang Huang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Zhijie Lin (Contact Author)

Tsinghua University - School of Economics and Management ( email )

Haidian District
Beijing, Beijing 100084
China

Subhasish Dasgupta

George Washington University ( email )

Information Systems and Technology Management Dept
Washington, DC 20052
United States
(202) 994-7408 (Phone)
(202) 994-5830 (Fax)

HOME PAGE: http://home.gwu.edu/~dasgupta

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