Information Asymmetry among Investors and Strategic Bidding in Peer-to-Peer Lending

Information Systems Research, forthcoming

77 Pages Posted: 20 Jun 2019 Last revised: 17 Dec 2021

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: December 2021

Abstract

We study how investors in peer-to-peer (P2P) lending utilize their information advantages in decisions on when to place bids. Literature documents that 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, it could be optimal for informed investors to bid early in projects with a low probability of being funded with the purpose of signaling the quality of these projects. With a unique dataset from Prosper.com, we use a matching analysis to show that, for projects with low credit grades, the probability of being successfully funded is positively correlated with early bids from informed investors. For funded loans, informed investors are more likely to bid in the early stage than uninformed investors, while uninformed investors will follow and bid at the late stage. Finally, there are more early bids from informed investors for “good” loans than for “bad” loans, indicating that the bids are informative for the quality of those projects. Our findings have important implications for managing the information asymmetry and strategic behaviors among investors on P2P 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 among Investors and Strategic Bidding in Peer-to-Peer Lending (December 2021). Information Systems Research, forthcoming, 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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