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Competition and Distortion: A Theory of Information Bias on the Peer-to-Peer Lending Market

Author

Listed:
  • Zhenhua Wu

    (School of Management, Nanjing University, Nanjing, Jiangsu 210000, P.R. China)

  • Lin Hu

    (College of Business and Economics, Australian National University, Canberra, Australian Capital Territory 2601, Australia)

  • Zhijie Lin

    (School of Economics and Management, Tsinghua University, Beijing 100084, P.R. China)

  • Yong Tan

    (Michael G. Foster School of Business, University of Washington, Seattle, Washington 98195)

Abstract

Despite the popular emergence of peer-to-peer (P2P) lending platforms, relevant research investigating the role of these platforms on P2P markets still lags. In this paper, we present a model to study the market incentives of P2P lending platforms’ optimal information-reporting strategies when the following exist: (i) uncertainty on the return of loans and (ii) competition from entrants. We focus on the information bias of platforms driven by demand-side actors—investors’ optimism/pessimism about risk—while we keep the platforms being rational. We characterize platforms’ equilibrium reporting strategies under different market conditions. Surprisingly, we find that when uncertainty is significant, and the threat of entry is strong but not detrimental, the platform has incentives to bias information toward investors’ biased beliefs. This result demonstrates a case where competition and uncertainty may jointly lead to information bias. However, a properly designed uncertainty-resolution mechanism could reduce the incentive. Our findings contribute to the literature on the P2P lending market by analyzing platform decisions and offer policy implications for regulating P2P lending market.

Suggested Citation

  • Zhenhua Wu & Lin Hu & Zhijie Lin & Yong Tan, 2021. "Competition and Distortion: A Theory of Information Bias on the Peer-to-Peer Lending Market," Information Systems Research, INFORMS, vol. 32(4), pages 1140-1154, December.
    • Handle: RePEc:inm:orisre:v:32:y:2021:i:4:p:1140-1154
    DOI: 10.1287/isre.2020.0956
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