Information Asymmetry and Strategic Early Bidding in Peer-to-Peer Lending
51 Pages Posted: 20 Jun 2019
Date Written: June 2019
We study how investors in peer-to-peer lending utilize their information advantage to bid strategically. As documented in the literature, better-informed investors could withhold bidding for a “good” loan until the last moment (i.e., “sniping”) to avoid competition. We argue that doing so however may cause the loan to fail as it is insufficiently funded. Investors thus face a tradeoff between the funding efficiency and the expected return when deciding the timing of bidding. Using a unique dataset from Prosper.com, we document the phenomenon of early bidding (or “squatting”) behaviors. We show that “good” loans attract more early bids than “bad” loans. Most importantly, “good” loans with a low ex-ante probability of funding success attract more early bids from better-informed investors. Those early bids would benefit not only the borrowers but also uninformed investors. Our findings provide important implications for managing the information asymmetry and strategic behaviors among investors for peer-to-peer lending platforms.
Keywords: Peer-To-Peer Lending, Online Auctions, Information Asymmetry, Sniping, Squatting
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