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

Research output: Contribution to journalReview article

374 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 languageEnglish (US)
Pages (from-to)17-35
Number of pages19
JournalManagement Science
Volume59
Issue number1
DOIs
StatePublished - Jan 1 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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