Download This PaperAsymmetric Information, Reputation, and Welfare in Online Credit Markets
53 Pages Posted: 13 May 2020 Last revised: 2 Nov 2025
Date Written: November 6, 2023
Abstract
This paper examines the effectiveness of reputation systems in facilitating transactions and improving borrower and lender welfare, using data from a leading peer-to-peer lending platform. I develop and estimate a dynamic discrete choice model of borrowers’ withdrawal and repayment decisions, where they face privately observed default costs and dynamic incentives from the reputation system. Counterfactual analysis shows that removing the reputation system leads to a 54% collapse in loan volume and a $24 million reduction in platform revenue. These losses are driven by sharply higher default rates in the absence of reputational incentives and the resulting decline in lender funding. Among the two components of the system, entry restrictions following default play the more critical role in sustaining market participation and mitigating moral hazard.
Keywords: Reputation Systems, Asymmetric Information, Adverse Selection, Moral Hazard, Dynamic Incentives, Online Credit Markets.
JEL Classification: L14, D82, G21, C14
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