Advantageous Selection in Fintech Loans

Abstract

Using data from the largest online lender in the United States, we document advantageous selection in loan amount. Exploiting a natural experiment within the platform, we show that borrowers who select larger loans are less likely to default. This selection is driven by households in states with bankruptcy-friendly laws, where borrowers' default costs are lower. A simple model of household borrowing shows that our 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: advantageous selection; marketplace lending; access to credit; financial innovation

JEL Classification: D14, G21, G23, G51