Auction vs. Posted-Price: Market Mechanism, Lender Behaviors, and Transaction Outcomes in Online Crowd-Funding
University of Arizona - Department of Economics
University of Arizona - Eller College of Management
September 1, 2013
Despite their popularity in electronic commerce, auctions appear to be losing some appeal to posted-price sales recently, as documented in several studies. Yet, there is little systematic research on how these different market mechanisms affect market participant behaviors and transaction outcomes. We exploit a regime change on a peer-to-peer micro-lending platform, Prosper.com, to answer this question in the context of crowd-funding. We first develop a stylized model that yields empirically testable hypotheses, then test them using detailed transactions data. Our empirical results support those theoretical hypotheses on the comparisons of interest rates and funding probabilities. In particular after the regime change, loans are funded with higher probability, but the pre-set interest rates under the posted-price regime tend to be higher than borrower's starting interest rates in the auctions. Meanwhile, all else equal, loans funded under the posted-price regime are more likely to default. These results justify Prosper's advertised purposes of switching to the pre-set interest rates regime, but also point to some unintended consequences. We further examine effects of the regime change on lender behaviors. These findings have implications for the design of online markets, online auctions, and the growing literature on crowd-funding.
Number of Pages in PDF File: 41
Keywords: Multiunit auctions, Posted-price, Crowd-funding, Peer-to-peer (P2P) lending, Observational learning
Date posted: September 21, 2013
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