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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29492
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| Title: | Do Social Networks Solve Information Problems for Peer-to-Peer
Lending?Evidence from Prosper.com |
| Authors: | Freedman, Seth - University of Maryland
Jin, Ginger Zhe - University of Maryland and NBER |
| Issue Date: | 2008 |
| Series/Report no.: | Net Institute Working Paper;08-43 |
| Abstract: | This paper studies peer-to-peer (p2p) lending on the Internet.
Prosper.com, the first p2p lending website in the US, matches individual
lenders and borrowers for unsecured consumer loans. Using transaction
data from June 1, 2006 to July 31, 2008, we examine what information
problems exist on Prosper and whether social networks help alleviate the
information problems. As we expect, data identifies three information
problems on Prosper.com. First, Prosper lenders face extra adverse
selection because they observe categories of credit grades rather than
the actual credit scores. This selection is partially offset when
Prosper posts more detailed credit information on the website. Second,
many Prosper lenders have made mistakes in loan selection but they learn
vigorously over time. Third, as Stiglitz and Weiss (1981) predict, a
higher interest rate can imply lower rate of return because higher
interest attracts lower quality borrowers. Micro-finance theories argue
that social networks may identify good risks either because friends and
colleagues observe the intrinsic type of borrowers ex ante or because
the monitoring within social networks provides a stronger incentive to
pay off loans ex post. We find evidence both for and against this
argument. For example, loans with friend endorsements and friend bids
have fewer missed payments and yield significantly higher rates of
return than other loans. On the other hand, the estimated returns of
group loans are significantly lower than those of non-group loans. That
being said, the return gap between group and non-group loans is closing
over time. This convergence is partially due to lender learning and
partially due to Prosper eliminating group leader rewards which
motivated leaders to fund lower quality loans in order to earn the rewards. |
| URI: | http://hdl.handle.net/2451/29492 |
| Appears in Collections: | NET Institute Working Papers Series
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