Strategic Herding Behavior in Peer-to-Peer Loan Auctions

32 Pages Posted: 27 Apr 2010

See all articles by Michal Herzenstein

Michal Herzenstein

University of Delaware

Utpal M. Dholakia

Rice University - Jesse H. Jones Graduate School of Business

Rick Andrews

University of Delaware

Date Written: April 27, 2010

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

Suggested Citation

Herzenstein, Michal and Dholakia, Utpal M. and Andrews, Rick, Strategic Herding Behavior in Peer-to-Peer Loan Auctions (April 27, 2010). Available at SSRN: https://ssrn.com/abstract=1596899 or http://dx.doi.org/10.2139/ssrn.1596899

Michal Herzenstein (Contact Author)

University of Delaware ( email )

Newark, DE 19711
United States

Utpal M. Dholakia

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Rick Andrews

University of Delaware ( email )

Newark, DE 19711
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
862
Abstract Views
3,770
rank
26,606
PlumX Metrics