Marketplace Lending: A New Banking Paradigm?

53 Pages Posted: 4 Feb 2018 Last revised: 24 Jan 2019

See all articles by Boris Vallee

Boris Vallee

Harvard Business School - Finance Unit

Yao Zeng

University of Washington - Michael G. Foster School of Business

Date Written: May 15, 2018

Abstract

Marketplace lending relies on screening and information production by investors, a major deviation from the traditional banking paradigm. Theoretically, the participation of sophisticated investors improves screening outcomes but also creates adverse selection among investors. In maximizing loan volume, the platform trades off these two forces. As the platform develops, it optimally increases platform pre-screening intensity but decreases information provision to investors. Using novel investor-level data, we find that sophisticated investors systematically outperform, and this outperformance shrinks when the platform reduces information provision to investors. Our findings shed light on the optimal distribution of information production in this new lending model.

Keywords: Marketplace lending, screening, sophisticated investors, adverse selection

JEL Classification: G21, G23, D82

Suggested Citation

Vallee, Boris and Zeng, Yao, Marketplace Lending: A New Banking Paradigm? (May 15, 2018). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3102984 or http://dx.doi.org/10.2139/ssrn.3102984

Boris Vallee (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

Yao Zeng

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://sites.google.com/site/yaozengwebsite/

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