Cutting out the Middleman: Crowdinvesting, Efficiency, and Inequality

We show how decentralized individual investments can efficiently allocate capital to innovating firms. We consider consumers with privately known but correlated consumption preferences who also act as investors. Consumers identify worthwhile investment opportunities based on their own preferences and invest in firms whose product they like. An efficient capital allocation is achieved if all groups of consumers have enough wealth to invest. If some groups of consumers cannot invest, capital flows reflect preferences of the wealthy but not future demand. Information gathering by financial intermediaries can improve the allocation of capital when wealth inequality prevents an efficient allocation by consumers.