Platform Mispricing and Lender Learning in Peer-to-Peer Lending

Review of Industrial Organization, 56(2), 281-314

47 Pages Posted: 25 Oct 2019 Last revised: 11 May 2020

See all articles by Xinyuan Liu

Xinyuan Liu

University of Arizona, Eller College of Management, Department of Economics, Students

Zaiyan Wei

Purdue University - Krannert School of Management

Mo Xiao

University of Arizona - Eller College of Management - Department of Economics

Date Written: March 2020

Abstract

We document how online lenders exploit a flawed, new pricing mechanism in a peer-to-peer lending platform: Prosper.com. Switching from auctions to a posted-price mechanism in December 2010, Prosper assigned loan listings with different estimated loss rates into seven distinctive rating grades and adopted a single price for all listings with the same rating grade. We show that lenders adjusted their investment portfolios towards listings at the low end of the risk spectrum of each Prosper rating grade. We find heterogeneity in the speed of adjustment by lender experience, investment size, and diversification strategies. It took about 16–17 months for an average lender to take full advantage of the “cherry-picking” opportunity under the single-price regime, which is roughly when Prosper switched to a more flexible pricing mechanism.

Keywords: Firm Learning, Pricing Mechanisms, Peer-to-peer Lending

JEL Classification: D22, G4, G11, L2, L86

Suggested Citation

Liu, Xinyuan and Wei, Zaiyan and Xiao, Mo, Platform Mispricing and Lender Learning in Peer-to-Peer Lending (March 2020). Review of Industrial Organization, 56(2), 281-314, Available at SSRN: https://ssrn.com/abstract=3470382

Xinyuan Liu

University of Arizona, Eller College of Management, Department of Economics, Students ( email )

AZ
United States
5202454646 (Phone)

Zaiyan Wei (Contact Author)

Purdue University - Krannert School of Management ( email )

100 Grant St
West Lafayette, IN 47907-2076
United States
(765) 494-5958 (Phone)

Mo Xiao

University of Arizona - Eller College of Management - Department of Economics ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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