Advantageous Selection in Fintech Loans

59 Pages Posted: 18 Feb 2021 Last revised: 18 Nov 2021

See all articles by Marco Pelosi

Marco Pelosi

London School of Economics & Political Science (LSE), Department of Finance; Bank of Italy - Research Department

Date Written: November 17, 2021

Abstract

Using data from the largest online lender in the United States, I document advantageous selection in loan amount. By exploiting a natural experiment within the platform, I show that borrowers who select larger loans are less likely to default. This selection is driven by households who live in states with bankruptcyfriendly laws, where borrowers’ default costs are lower. Standard models where borrowers maximize their utility cannot rationalize my results and make the opposite prediction. In a simple model of household borrowing, I show that my results can
be explained by the fact that borrowers facing higher loan prices search more intensively for cheaper loans. This effect is stronger for the safest borrowers, as they enjoy the greatest benefits from switching.

Keywords: Online Lending, Household Finance

Suggested Citation

Pelosi, Marco, Advantageous Selection in Fintech Loans (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=3786766 or http://dx.doi.org/10.2139/ssrn.3786766

Marco Pelosi (Contact Author)

London School of Economics & Political Science (LSE), Department of Finance ( email )

London
Great Britain

Bank of Italy - Research Department ( email )

Via Nazionale 91
00184 Roma
Italy

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