Social Connectedness and Peer Influences: Impact on 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. Loan demand increases substantially with past borrowing activities of geographically distant but socially connected areas, with an elasticity of 0.31. Borrower-area social proximity to deposits increases funding likelihood by 3.38% 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