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
Date Written: February 1, 2021
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: Suggested Citation