Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending

Western Finance Association 2009 Annual Meeting Paper

48 Pages Posted: 9 Mar 2009 Last revised: 19 Jun 2014

Mingfeng Lin

University of Arizona - Eller College of Management

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business

Date Written: July 1, 2011

Abstract

We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace - Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex-post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets.

Keywords: peer-to-peer lending, social networks, information asymmetry

Suggested Citation

Lin, Mingfeng and Prabhala, Nagpurnanand and Viswanathan, Siva, Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending (July 1, 2011). Western Finance Association 2009 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1355679 or http://dx.doi.org/10.2139/ssrn.1355679

Mingfeng Lin (Contact Author)

University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business ( email )

4427 Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2165 (Phone)
301-405-0359 (Fax)

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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