Group Membership, Relationship Banking and Loan Default Risk: The Case of Online Social Lending

Abstract:     
This paper investigates default risk for online social lending markets based on group membership. Online social lending refers to loan auction websites where individuals lend money to other individuals. Being a member of a social lending group within an online lending community is associated with significantly decreased default risk only if membership holds the possibility of real-life personal connections. Loans for non-group borrowers appear to behave like arm’s-length transactions, whereas loans for group borrowers have characteristics similar to relationship banking. The effect of private soft information on the interest rate of group loans is isolated and shown to be significant via orthogonalization of the public credit score and a proxy for the private credit score known only within the group.

Number of Pages in PDF File: 40

Keywords: Relationship Banking, Group Banking, Default Risk, Social Lending, Peer-to-Peer Lending, Venture Capital, Social Connections, Credit, Internet, Microfinance

JEL Classification: G21, G24, L14, O33, D19, D82

working papers series