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

52 Pages Posted: 20 Jun 2019 Last revised: 15 Oct 2019

See all articles by Kai Lu

Kai Lu

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

Zaiyan Wei

Purdue University - Krannert School of Management

Tat Chan

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

Date Written: October 2019

Abstract

We study how investors in peer-to-peer (P2P) lending utilize their information advantage to bid strategically. As documented in the auction literature, better-informed bidders may withhold bidding until the last moment (i.e., “sniping”) to avoid competition. We argue that, since collective effort from investors is required in P2P lending, informed investors are facing a tradeoff between the funding probability of loan requests and the anticipated return of their investment when deciding the timing of bidding. Using a unique dataset from Prosper.com, we document the phenomenon of an early bidding (or “squatting”) strategy. 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 on peer-to-peer lending platforms.

Keywords: Peer-To-Peer Lending, Online Auctions, Information Asymmetry, Sniping, Squatting

Suggested Citation

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

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)

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

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