Judging borrowers by the company they keep: Friendship networks and information asymmetry in online peer-to-peer lending

Mingfeng Lin; Nagpurnanand R. Prabhala; Siva Viswanathan

doi:10.1287/mnsc.1120.1560

Judging borrowers by the company they keep: Friendship networks and information asymmetry in online peer-to-peer lending

Mingfeng Lin, Nagpurnanand R. Prabhala, Siva Viswanathan

Management Information Systems

Research output: Contribution to journal › Review article › peer-review

879 Scopus citations

Abstract

We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets.

Original language	English (US)
Pages (from-to)	17-35
Number of pages	19
Journal	Management Science
Volume	59
Issue number	1
DOIs	https://doi.org/10.1287/mnsc.1120.1560
State	Published - Jan 2013

Keywords

Credit markets
Information asymmetry
Peer-to-peer (P2P) lending
Signaling
Value of social networks

ASJC Scopus subject areas

Strategy and Management
Management Science and Operations Research

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10.1287/mnsc.1120.1560

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title = "Judging borrowers by the company they keep: Friendship networks and information asymmetry in online peer-to-peer lending",

abstract = "We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets.",

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AB - We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets.

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KW - Peer-to-peer (P2P) lending

KW - Signaling

KW - Value of social networks

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Judging borrowers by the company they keep: Friendship networks and information asymmetry in online peer-to-peer lending

Abstract

Keywords

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