Borrowing from a Bigtech Platform

Abstract

We model competition between banks and a bigtech platform that lend to a merchant with private information and subject to moral hazard. By controlling access to a valuable marketplace for the merchant, the platform enforces partial loan repayments, thus alleviating financing frictions, reducing the risk of strategic default, and contributing to welfare positively. Credit markets become partially segmented, with the platform targeting merchants of low and medium perceived credit quality. However, conditional on observables, the platform lends to better borrowers than banks because bad borrowers self-select into bank loans to avoid the platform's enforcement, causing negative welfare effects in equilibrium.

Keywords: Bigtech, platform, enforcement, adverse selection, moral hazard, advantageous screening, welfare, credit rationing

JEL Classification: G21, G23, C72, D82