Survival Scale: Marketplace Lending and Asymmetric Network Effects
64 Pages Posted: 4 Oct 2019 Last revised: 31 Oct 2019
Date Written: October 2019
We utilize a large panel data of peer-to-peer (P2P) lending platforms in China to examine the determinants of platform dynamics in an emerging industry characterized by entries, exits, and network externalities. We find that cross-side network effects (CNEs) captured by standard elasticity measures alter platforms’ scale, which in turn affect future platform performances through customer matching and risk diversification. CNEs are persistent and lenders’ CNEs are asymmetrically larger during platform growth than during platform declines. Borrowers’ CNEs are symmetric and indicate borrowers’ greater stickiness. Lenders’ CNEs also dominate borrowers’ in foretelling failures and, together with scale, strongly predict platforms’ long-term likelihood of survival since inception. These asymmetric network effects reflect distinguishing features of financial platforms, inherent differences between lenders and borrowers, and contracting or agency frictions. Overall, our empirical findings and their novel economic channels inform practitioners, investors, and regulators, while providing insights about industry-wide dynamics of multi-sided platforms.
Keywords: FinTech; Peer-to-peer Lending; Platforms; Two-sided Markets
JEL Classification: G19; G23; L13; L81
Suggested Citation: Suggested Citation