The Power of Non-Monetary Incentive: Experimental Evidence from P2P Lending in China

Abstract

The adoption of reputational sanctions in the P2P segment of the Chinese consumer finance market offers a unique opportunity to test the impact of reputational concerns on repayment behavior in a clean experimental setting. In a privately implemented randomized controlled trial of 18,000 late borrowers, we show that, within 24 hours, late borrowers are sensitive to increasing monetary benefits but equally responsive to the announcement to proceed with the release of information about delinquent payments to mobile contacts, as per loan agreement. In joint schemes, the social incentive neutralizes the benefits of increasing the generosity of the monetary incentive. Ex-post reminders and monetary punishment are largely ineffective. Borrowers who respond to early incentives largely pay-off the loan on time. Mobile data overcome the physical presence of communities to tackle moral hazard and precisely identify effective credit monitors, even in the absence of their actual involvement.

Keywords: Peer-to-Peer Lending, Incentives, Loan Payments, Reputational Concerns, China

JEL Classification: G10, G23, O1