Information Asymmetry and Strategic Early Bidding in Peer-to-Peer Lending
52 Pages Posted: 20 Jun 2019 Last revised: 15 Oct 2019
Date Written: October 2019
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
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