Asymmetric Cross-side Network Effects on Financial Platforms:Theory and Evidence from Marketplace Lending

68 Pages Posted: 4 Oct 2019 Last revised: 15 Mar 2021

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Danxia Xie

Tsinghua University - Institute of Economics

Qi Miao

The Nielsen Company

Date Written: February 1, 2021

Abstract

Using data on 988 peer-to-peer lending platforms in China, we examine cross-side network effects (CNEs)---arguably the most important factor for multi-sided marketplaces---throughout platforms’ lifecycle in a dynamic industry characterized by entries, exits, and network externalities. We find that unlike borrowers’ symmetric CNEs, lenders’ CNEs are lower on declining, more established, or smaller platforms than on growing, new, or larger platforms. Borrowers’ CNEs are also larger than lenders’ CNEs, especially for declining or sub-scale platforms. We rationalize the asymmetries in a model of financial platforms incorporating endogenous failures and their empirically motivated distinguishing features: lenders’ portfolio diversification, failures’ differential impacts on agents, and borrowers’ stickiness. The model further predicts that lenders’ CNEs and platforms’ ranks predict the platforms’ survival likelihood, among others, which the data corroborate. Our findings provide novel economic insights on multi-sided platforms and inform FinTech practitioners and regulators.

Keywords: Network Externality; P2P Lending; Platforms; FinTech

JEL Classification: G19; G23; L13; L81

Suggested Citation

Cong, Lin and Tang, Ke and Xie, Danxia and Miao, Qi, Asymmetric Cross-side Network Effects on Financial Platforms:Theory and Evidence from Marketplace Lending (February 1, 2021). Available at SSRN: https://ssrn.com/abstract=3461893 or http://dx.doi.org/10.2139/ssrn.3461893

Lin Cong (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.linwilliamcong.com/

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

Danxia Xie

Tsinghua University - Institute of Economics ( email )

MingZhai Building
Beijing, 100084
China

HOME PAGE: http://danxiaxie.com

Qi Miao

The Nielsen Company ( email )

China

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