Mitigating Adverse Selection in P2P Lending – Empirical Evidence from Prosper.com

28 Pages Posted: 1 Aug 2010

See all articles by Gregor N. F. Weiss

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Katharina Pelger

Ruhr Universität Bochum

Andreas Horsch

Freiberg University

Date Written: July 29, 2010

Abstract

This paper presents novel empirical evidence on the success of efforts by P2P lending platforms to limit adverse selection using a unique sample of 5,385 credit transactions on the internet platform Prosper.com. The results of our regressions on the probability of a credit bid’s successful funding show that all variables for which a significant influence on the probability of funding success could be found describe information which is verified by Prosper.com. Conversely, all non-verified variables do not possess any significant influence on the dependent variable thus confirming our hypothesis that the screening of potential borrowers is a major instrument in mitigating adverse selection in P2P lending and preventing the online market to collapse. Moreover, we find evidence confirming the proposition that the screening of potential borrowers by groups can help mitigate adverse selection. Group membership, however, does also seem to have a positive influence on the probability of a credit bid expiring, a novel finding of this study.

Keywords: P2P lending, online market, adverse selection, social lending

JEL Classification: G10, G21

Suggested Citation

Weiss, Gregor N. F. and Pelger, Katharina and Horsch, Andreas, Mitigating Adverse Selection in P2P Lending – Empirical Evidence from Prosper.com (July 29, 2010). Available at SSRN: https://ssrn.com/abstract=1650774 or http://dx.doi.org/10.2139/ssrn.1650774

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

Katharina Pelger

Ruhr Universität Bochum ( email )

Universitätsstraße 150
Bochum, NRW 44780
Germany

Andreas Horsch

Freiberg University ( email )

Freiberg, D-09599
Germany

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