Judging Borrowers by the Company They Keep
Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending
The authors 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 — they found 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. They discuss the implications of the findings for the disintermediation of financial markets and the design of decentralized electronic markets.
Mingfeng Lin is an assistant professor of MIS, Eller College of Management, University of Arizona. Nagpurnanand R. Prabhala and Siva Viswanathan are both of the Robert H. Smith School of Business, University of Maryland, College Park.
Forthcoming in Management Science.