The Dark Side of Unregulated Artificial Intelligence: Evidence from Online Marketplace Lending
75 Pages Posted: 8 May 2020
Date Written: April 14, 2020
Using a unique, order-level data set on artificial intelligence (AI) versus human bidding for a Chinese online market place lending platform, we uncover serious ethical challenges of the unregulated AI. We find AI “skims off the cream” through (1) strategic information provision, (2) fast trading, and (3) price manipulation. In a regression discontinuity design, we show individual investor returns decrease and borrowers pay more in financing costs due to AI cream-skimming. Further evidence reveals a misalignment of interest when a platform’s private interest in loan origination exceeds its expected loss in management fees. We also discuss the corresponding regulatory strategies.
Keywords: AI investment, Cream-skimming, Fast trading, Misalignment of interest, Regulation, P2P lending
JEL Classification: G14, G21, G23, G28, K2
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