Rational Herding in Microloan Markets: Online Appendix

Management Science, Vol. 58, No. 5, May 2012

10 Pages Posted: 19 Sep 2011 Last revised: 6 Jun 2012

See all articles by Juanjuan Zhang

Juanjuan Zhang

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Peng Liu

Cornell University

Date Written: May 2012


This document presents supporting materials for the following publication:

Zhang, Juanjuan and Peng Liu (2012), "Rational Herding in Microloan Markets," Management Science, Vol. 58, No. 5, May, pp. 892-912.

Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel dataset which tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders. Well-funded borrower listings tend to attract more funding after we control for unobserved listing heterogeneity and payoff externalities. Moreover, instead of passively mimicking their peers (irrational herding), lenders engage in active observational learning (rational herding); they infer the creditworthiness of borrowers by observing peer lending decisions, and use publicly observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Similarly, favorable borrower characteristics (e.g., friend endorsements) weaken the herding effect, as lenders attribute herding to these observable merits. Follow-up analysis shows that rational herding beats irrational herding in predicting loan performance.

Keywords: Rational Herding, Observational Learning, Bayesian Inference, Microloan Markets, Peer-to-Peer Lending, Prosper.com

JEL Classification: D82, D83

Suggested Citation

Zhang, Juanjuan and Liu, Peng, Rational Herding in Microloan Markets: Online Appendix (May 2012). Management Science, Vol. 58, No. 5, May 2012. Available at SSRN: https://ssrn.com/abstract=1930687

Juanjuan Zhang (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Cambridge, MA 02142
United States

HOME PAGE: http://jjzhang.scripts.mit.edu

Peng Liu

Cornell University ( email )

465B Statler Hall
Ithaca, NY 14853
United States
6072542960 (Phone)

HOME PAGE: http://www.professorliu.net

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