Journal
MANAGEMENT SCIENCE
Volume 59, Issue 1, Pages 17-35Publisher
INFORMS
DOI: 10.1287/mnsc.1120.1560
Keywords
peer-to-peer (P2P) lending; value of social networks; signaling; information asymmetry; credit markets
Funding
- Ewing Marion Kauffman Foundation
- Economic Club of Washington
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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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