Can social networks help mitigate information asymmetry in online markets?

This study examines whether online social networks can help mitigate information asymmetry in online markets, and if so, what aspects of these networks generate value for market participants. Using a comprehensive dataset on transactions and social network information in an online peer-to-peer lending market, Prosper.com, we empirically study the linkage between borrowers' social network positions and their transactional outcomes. Our results highlight the distinction between the structural and relational dimensions of social networks. Stronger ties, where social and economic relations intertwine with each other, create value by both exerting peer pressures and increasing the verifiability of network ties, thereby alleviating the information asymmetry between borrowers and lenders. Our findings contribute to the growing IS literature on the economics of social networks as well as to the study of online quality signaling mechanisms.