Trust and Credit

Abstract:     
This study considers the impact of trustworthiness on financial markets at the individual transaction level. We employ a natural experiment using the peer-to-peer lending site, Prosper.com. We find that borrowers who are perceived as untrustworthy are economically and significantly less likely to have their loan requests filled, even controlling for physical attractiveness, detailed demographic information, credit profile, income, education, employment and loan-specific information. Indeed, in order to have the same probability of being funded as a borrower perceived as trustworthy, a borrower who is perceived as untrustworthy must pay a promised interest rate that is 182 basis points higher. These results suggest that agent's perceptions of trustworthiness are important, even in relatively information-rich environments.

Keywords: Trust, information asymmetry, consumer credit, peer-to-peer lending

JEL Classifications: D81, D83, G21

Working Paper Series