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Market Mechanisms in Online Peer-to-Peer Lending

Forthcoming, Management Science

39 Pages Posted: 21 Sep 2013 Last revised: 12 Apr 2016

Zaiyan Wei

Purdue University - Krannert School of Management

Mingfeng Lin

University of Arizona - Eller College of Management

Date Written: April 1, 2016


Online Peer-to-Peer lending (P2P lending) has emerged as an appealing new channel of financing in recent years. A fundamental but largely unanswered question in this nascent industry is the choice of market mechanisms, i.e., how the supply and demand of funds are matched, and the terms (price) at which transactions will occur. Two of the most popular mechanisms are auctions (where the "crowd" determines the price of the transaction through an auction process) and posted prices (where the platform determines the price). While P2P lending platforms typically use one or the other, there is little systematic research on the implications of such choices for market participants, transaction outcomes, and social welfare. We address this question both theoretically and empirically. We first develop a game-theoretic model that yields empirically testable hypotheses, taking into account the incentive of the platform. We then test these hypotheses by exploiting a regime change from auctions to posted prices on one of the largest P2P lending platforms. Consistent with our hypotheses, we find that under platform-mandated posted prices, loans are funded with higher probability, but the pre-set interest rates are higher than borrowers' starting interest rates and contract interest rates in auctions. More important, all else equal, loans funded under posted prices are more likely to default, thereby undermining lenders' returns on investment and their surplus. Although platform-mandated posted prices may be faster in originating loans, auctions that rely on the "crowd" to discover prices are not necessarily inferior in terms of overall social welfare.

Keywords: Peer-to-peer lending, Market mechanisms, Auctions, Posted prices, Debt crowdfunding

Suggested Citation

Wei, Zaiyan and Lin, Mingfeng, Market Mechanisms in Online Peer-to-Peer Lending (April 1, 2016). Forthcoming, Management Science. Available at SSRN: or

Zaiyan Wei (Contact Author)

Purdue University - Krannert School of Management ( email )

West Lafayette, IN 47907-1310
United States

Mingfeng Lin

University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States

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