Platform Mispricing and Lender Learning in Peer-to-Peer Lending

Xinyuan Liu, Zaiyan Wei, Mo Xiao

Research output: Contribution to journalArticlepeer-review

Abstract

We document how online lenders exploit a flawed, new pricing mechanism in a peer-to-peer lending platform: Prosper.com. Switching from auctions to a posted-price mechanism in December 2010, Prosper assigned loan listings with different estimated loss rates into seven distinctive rating grades and adopted a single price for all listings with the same rating grade. We show that lenders adjusted their investment portfolios towards listings at the low end of the risk spectrum of each Prosper rating grade. We find heterogeneity in the speed of adjustment by lender experience, investment size, and diversification strategies. It took about 16–17 months for an average lender to take full advantage of the “cherry-picking” opportunity under the single-price regime, which is roughly when Prosper switched to a more flexible pricing mechanism.

Original languageEnglish (US)
Pages (from-to)281-314
Number of pages34
JournalReview of Industrial Organization
Volume56
Issue number2
DOIs
StatePublished - Mar 1 2020

Keywords

  • Firm learning
  • Peer-to-peer lending
  • Pricing mechanisms

ASJC Scopus subject areas

  • Economics and Econometrics
  • Strategy and Management
  • Organizational Behavior and Human Resource Management
  • Management of Technology and Innovation

Fingerprint Dive into the research topics of 'Platform Mispricing and Lender Learning in Peer-to-Peer Lending'. Together they form a unique fingerprint.

Cite this