Market Mechanisms in Online Peer-to-Peer Lending

Abstract

O nline peer-to-peer lending (P2P lending) has emerged as an appealing new channel of financing in recent years. A fundamental but largely unanswered question in this nascent industry is the choice of market mechanisms, i.e., how the supply and demand of funds are matched, and the terms (price) at which transactions will occur. Two of the most popular mechanisms are auctions (where the "crowd" determines the price of the transaction through an auction process) and posted prices (where the platform determines the price). While P2P lending platforms typically use one or the other, there is little systematic research on the implications of such choices for market participants, transaction outcomes, and social welfare. We address this question both theoretically and empirically. We first develop a game-theoretic model that yields empirically testable hypotheses, taking into account the incentive of the platform. We then test these hypotheses by exploiting a regime change from auctions to posted prices on one of the largest P2P lending platforms. Consistent with our hypotheses, we find that under platform-mandated posted prices, loans are funded with higher probability, but the preset interest rates are higher than borrowers' starting interest rates and contract interest rates in auctions. More important, all else equal, loans funded under posted prices are more likely to default, thereby undermining lenders' returns on investment and their surplus. Although platform-mandated posted prices may be faster in originating loans, auctions that rely on the crowd to discover prices are not necessarily inferior in terms of overall social welfare.

Access to the Internet and Access to Finance: Theory and Evidence

“…A variety of literature has made efforts to delve into the forms of crowdfunding, such as an equity purchase, loan, or pre-order on a product [48][49][50][51][52], or the economic mechanisms of peer-to-peer lending [15,[53][54][55]. For example, Wei and Lin [15] both theoretically and empirically investigated how the supply and demand of funds in online peer-to-peer lending markets are matched, and the prices at which transactions will occur. They concluded that, under platform-mandated posted prices, loans are funded with high probability, but at the same time with relatively high preset interest rates.…”

“…In fact, financing difficulty of small and micro businesses is universal across the world for both developing and developed countries, which has been documented by substantial research [6][7][8][9]. On the other hand, rare literature directly explores the relationship between the use of the Internet and individual or firms' access to external finance, although a strand of literature [10][11][12][13][14][15] has investigated the influence of online peer-to-peer lending as an appealing new channel of financing on people's economic behavior. This study attempted to fill the void in the environment of an emerging economy, China.…”

“…Our paper, therefore, contributes to the growing literature on Internet finance as well as the broader literature on crowdfunding. Recent investigations include [10][11][12]14,15,[17][18][19][20][21][22][23][24][25][26][27]. Given that the explosive penetration of the Internet and Mobile Internet that has laid a sound foundation in China, which has been rapidly skyrocketing (China has greater Internet and mobile Internet development among emerging market economies with penetration ratios of 45% and 37.1%, respectively, in 2013, reported by Lei [19]), our study has important and timely implications not only for academics and practitioners, but for policy makers as well.…”

Monetary Policies versus Regulatory Policies: Management of Peer to Peer Market Interest Rates

“…Research has been conducted on P2P market interest rates, including the pricing mechanism (Wei and Lin, 2016), marketization (Liao et al, 2014), discrimination (Pope and Sydnor, 2011) and social relations (Lin et al, 2013;Freedman and Jin, 2017). Previous studies on the determinants or influencing factors of P2P interest rates were mostly conducted from within the market and mainly focused on the micro characteristics.…”

Dynamic Cross‐Correlations between Participants’ Attentions to P2P Lending and Offline Loan in the Private Lending Market

“…And, it is meaningful to explore the correlation of participants' attentions in the whole private lending market in China. Recent research on the private lending market system mainly includes (1) the related research on the P2P lending market, such as borrowing success rate and default rate [14][15][16][17][18], investor behavior [19][20][21][22], and credit evaluation and market mechanism [23][24][25][26][27][28]; (2) the relationship between the informal credit market and the formal credit market [6,[29][30][31][32]; and (3) the research on offline loan [33][34][35]. erefore, this paper expands the research scope of the existing literature by investigating the extent of interdependence across time to clarify whether participants' attentions to P2P lending and offline loan are segmented or becoming more integrated.…”