Social Networks as Information Conduits for Online Credit Supply and Demand

Abstract

Social networks impact both the demand for and supply of consumer and small business loans originated on lending marketplaces. Online loan demand is increased by past borrowing activities of geographically distant but socially connected areas, particularly for disadvantaged areas with low levels of social capital. Borrower-area social proximity to deposits increases funding likelihood and improves ex-post loan performance. We establish causality with granular instrumental variables obtained from natural disasters (demand-side) and financial adviser misconduct (supply-side). The results suggest social networks improve capital allocation by increasing the awareness of alternative lending platforms and facilitating the transmission of less accessible information complementary to loan-specific data.

Keywords: social network, peer effects, social proximity to deposits (SPD), information transmission, online lending marketplaces, credit demand and supply, platform design, social finance

JEL Classification: G20, G21, G23, G28, G29