Information Asymmetry and Strategic Early Bidding in Peer-to-Peer Lending

51 Pages Posted: 20 Jun 2019

See all articles by Tat Chan

Tat Chan

Washington University in St. Louis - John M. Olin Business School

Kai Lu

University of Science and Technology of China - International Institute of Finance, School of Management

Zaiyan Wei

Purdue University - Krannert School of Management

Date Written: June 2019

Abstract

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

Suggested Citation

Chan, Tat and Lu, Kai and Wei, Zaiyan, Information Asymmetry and Strategic Early Bidding in Peer-to-Peer Lending (June 2019). Available at SSRN: https://ssrn.com/abstract=3403211 or http://dx.doi.org/10.2139/ssrn.3403211

Tat Chan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Kai Lu

University of Science and Technology of China - International Institute of Finance, School of Management ( email )

96 JinZhai Rd
Hefei, Anhui 230026
China

Zaiyan Wei (Contact Author)

Purdue University - Krannert School of Management ( email )

100 Grant St
West Lafayette, IN 47907-2076
United States
(765) 494-5958 (Phone)

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