How Incentive Structure Affects the Effectiveness of Referral Strategy: Evidence from a Randomized Field Experiment on a Lending Platform

6 Pages Posted: 16 Oct 2017

See all articles by John (Qiang) Li

John (Qiang) Li

Hong Kong University of Science & Technology (HKUST)

Bo Zhao

University of Hong Kong - Faculty of Business and Economics; Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD)

Brian Wu

University of Michigan, Stephen M. Ross School of Business

Date Written: June 24, 2017

Abstract

Large and high quality user base is an important determinant of firm performance. Firms spend a great amount of resources in building referral programs to grow user base. Yet, substantial variations exist in the effectiveness of these referral programs with various incentive structures. We argue that the extent to which referral programs can grow user base depends on how existing users evaluate the cost and benefit of their referral behavior. Using a large-scale randomized field experiment with around one hundred thousand participants on one of the largest P2P lending platforms in China, we find that referral programs structured as self-benefit (egoistic) appeal or other-benefit (altruistic) appeal significantly reduce the number of new users brought by the existing users but new users from other-benefit appeal made more investment. Our study demonstrates that under certain circumstances, these referral programs structured as egoistic or altruistic incentive structure may backfire.

Keywords: Incentive structure; Referrals; Firm growth; Platform

JEL Classification: M00

Suggested Citation

Li, John (Qiang) and Zhao, Bo and Wu, Brian, How Incentive Structure Affects the Effectiveness of Referral Strategy: Evidence from a Randomized Field Experiment on a Lending Platform (June 24, 2017). Available at SSRN: https://ssrn.com/abstract=3053649 or http://dx.doi.org/10.2139/ssrn.3053649

John (Qiang) Li (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Bo Zhao

University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong

Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD) ( email )

Philippines

Brian Wu

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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