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 journalArticle

305 Citations (Scopus)

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 2013

Fingerprint

Peer to peer
Friendship
Information asymmetry
Lending
Economic effect
Online markets
Bid
Financial markets
Interest rates
Loans
Disintermediation
Default rate
Credit
Funding
Electronic markets

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

Cite this

Judging borrowers by the company they keep : Friendship networks and information asymmetry in online peer-to-peer lending. / Lin, Mingfeng; Prabhala, Nagpurnanand R.; Viswanathan, Siva.

In: Management Science, Vol. 59, No. 1, 01.2013, p. 17-35.

Research output: Contribution to journalArticle

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