Platform Choice in Online Peer-to-Peer Lending Markets: A Joint Structural Model

Abstract

Online peer-to-peer (P2P) lending is a two-sided market that enables direct interactions between borrowers and investors. The network effects that arise in P2P lending markets can make the decision-making process of both participant groups interdependent. However, extant research on P2P lending primarily focuses on decisions of one specific participant group without considering the interactive behaviors from the other side of the market. We attempt to fill this gap by developing a utility-based structural model that simultaneously governs both borrowers’ and investors’ platform choice decisions. Our results show that a platform’s short-term liquidity, cross-network effect (CNE), and direct-network effect (DNE) are the top three factors that positively drive investors’ platform choice. In contrast, a platform’s background, tenure, membership fee, long-term debt risk, and the average loan duration have a negative effect on their participation decision. On the borrower side, we find that a platform’s short-term liquidity, tenure, CNE, and DNE are the top four factors that attract their platform selection, while a platform’s background and membership fee will reduce their utility of choosing the platform. Overall, borrowers play a more important role than investors in the growth of a P2P lending platform. The counterfactual analyses suggest that a handful of interventions can be implemented to influence both investors’ and borrowers’ platform choice. The new information-transparency regulations issued in China are estimated to save investors more than $1.36 million. Our findings offer important managerial implications for platform managers and policy makers in the P2P lending market.

Keywords: Online P2P Lending, Platform Selection, Platform Governance, Two-Sided Market, Demand Estimation, Social Welfare