Among Peers: The Impact of Homophily in Online Investment
38 Pages Posted: 29 Mar 2022
Date Written: November 7, 2021
We investigate if homophily—peoples’ affinity for similar others—is an issue in online investment, too. Drawing on nearly 22,000 loan applications and 54,000 investments obtained from one of the leading online peer-to-peer lending platforms in Europe, we document strong evidence in support of investor homophily even absent in-person interaction. Being in the same age group as a given investor increases a loan applicant’s odds of being funded by as much as 13%, while same-sex dyads are associated with 7% higher odds of investment. Moreover, an additional demographic similarity increases the average investment amount by more than 8%. Investors’ affinity for similar borrowers does not seem to reflect a preference for funding particular loan purposes. Finally, we document a significantly negative difference of -0.28 percentage points in risk-adjusted interest rates of loans associated with investor-borrower dyads exhibiting the highest versus lowest number of homophilous ties. While this could be rationalized by demographic commonalities reducing the cost of searching and processing investment-relevant information, results from additional analyses suggest otherwise. In sum, our evidence is hard to square with the notion that investors’ affinity for similar borrowers in online peer-to-peer lending exploits economic benefits to sameness.
Keywords: homophily, online investment, peer-to-peer lending, crowdfunding, funding probability, decision heuristics
JEL Classification: D12, D14, G20, G41
Suggested Citation: Suggested Citation