Strategic Herding Behavior in Peer-to-Peer Loan Auctions

Abstract

Online Peer-to-Peer (P2P) loan auctions enable individual consumers to borrow and lend money directly to one another. We study herding behavior, defined as a greater likelihood of bidding in auctions with more existing bids, in P2P loan auctions on Prosper.com. The results of an empirical study provide evidence of strategic herding behavior by lenders such that they have a greater likelihood of bidding on an auction with more bids (a 1% increase in the number of bids increases the likelihood of an additional bid by 15%), but only to the point at which it has received full funding. After this point, herding diminishes (a 1% increase in bids increases the likelihood of an additional bid by only 5%). We also find a positive association between herding in the loan auction and its subsequent performance, that is, whether borrowers pay the money back on time. Unlike eBay auctions where herding impacts bidders adversely, our findings reveal that strategic herding behavior in P2P loan auctions benefits bidders, individually and collectively.

Keywords: Online auctions, bidding behavior, herding behavior, peer-to-peer lending