The Dark Side of Unregulated Artificial Intelligence: Evidence from Online Marketplace Lending

75 Pages Posted: 8 May 2020

See all articles by Xiaoyang Li

Xiaoyang Li

The Chinese University of Hong Kong (CUHK)

Haitian Lu

Hong Kong Polytechnic University

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Date Written: April 14, 2020

Abstract

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

Suggested Citation

Li, Xiaoyang and Lu, Haitian and Hasan, Iftekhar, The Dark Side of Unregulated Artificial Intelligence: Evidence from Online Marketplace Lending (April 14, 2020). Available at SSRN: https://ssrn.com/abstract=3575260 or http://dx.doi.org/10.2139/ssrn.3575260

Xiaoyang Li (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Haitian Lu

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom
Hong Kong

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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