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

Banking and Finance Review, 7(2)

31 Pages Posted: 31 Aug 2008 Last revised: 3 Sep 2015

See all articles by Craig R. Everett

Craig R. Everett

Pepperdine University - Graziadio School of Business and Management

Date Written: September 1, 2015

Abstract

This paper uses a new data source, online social lending (a.k.a. peer-to-peer lending), to help answer the question of what impact borrower-lender information asymmetries have on adverse selection, moral hazard and the hold-up problem. The hold-up problem refers to when lenders with private positive information do not pass long the savings associated with lower borrower risk to the borrower. The results indicate that the hold-up problem is more severe with private lenders than public lenders, and that personal relationships can mitigate the moral hazard problem. This data source has characteristics such as group membership that allow analysis of the public (outsider) versus private (insider) debt choice without some of the endogeneity issues that are present when using other data sources. Each loan contains detailed bidding information from both public and private investors. Thus, a clean distinction can be drawn between public and private debt without the potential problem of unobserved borrower risk characteristics.

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

Suggested Citation

Everett, Craig R., Group Membership, Relationship Banking and Loan Default Risk: The Case of Online Social Lending (September 1, 2015). Banking and Finance Review, 7(2). Available at SSRN: https://ssrn.com/abstract=1114428 or http://dx.doi.org/10.2139/ssrn.1114428

Craig R. Everett (Contact Author)

Pepperdine University - Graziadio School of Business and Management ( email )

24255 Pacific Coast Hwy
Malibu, CA 90263
United States
(310) 506-8543 (Phone)

HOME PAGE: http://bschool.pepperdine.edu/faculty/default.php?faculty=craig_everett

Register to save articles to
your library

Register

Paper statistics

Downloads
3,199
rank
3,028
Abstract Views
15,306
PlumX Metrics