Crowdfunding in the context of new institutional economics

Abstract

New Institutional Economics can help explain why new institutions like crowdfunding arise. Irrespective of their constitution and status, institutions receive their legitimacy from the necessity to restrict and organise transactions and social behaviour. Characteristically, developed countries have stronger institutions and their citizens primarily rely on formal institutions. Although the Chinese government is promoting the formalisation of its institutions, per definition and as of today, the PRC is still a developing or at least a transition country. In particular, in terms of its financial sector, China is struggling to accelerate reforms. Indeed, the majority of its population still relies on informal finance as formal institutions do not meet their demand for finance. This work will argue that crowdfunding has the potential to bridge informal and formal financial institutions in China and eventually support the country’s move towards a developed country with strong institutions.