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Learning by Doing with Asymmetric Information: Evidence from Prosper.com

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  • Seth M. Freedman
  • Ginger Zhe Jin
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    Abstract

    Using peer-to-peer (P2P) lending as an example, we show that learning by doing plays an important role in alleviating the information asymmetry between market players. Although the P2P platform (Prosper.com) discloses part of borrowers’ credit histories, lenders face serious information problems because the market is new and subject to adverse selection relative to offline markets. We find that early lenders did not fully understand the market risk but lender learning is effective in reducing the risk over time. As a result, the market excludes more and more sub-prime borrowers and evolves towards the population served by traditional credit markets.

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    File URL: http://www.nber.org/papers/w16855.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16855.

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    Date of creation: Mar 2011
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    Handle: RePEc:nbr:nberwo:16855

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    1. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
    2. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," NBER Working Papers 13360, National Bureau of Economic Research, Inc.
    3. Timothy C. Salmon, 2001. "An Evaluation of Econometric Models of Adaptive Learning," Econometrica, Econometric Society, vol. 69(6), pages 1597-1628, November.
    4. Jun, Byoung & Vives, Xavier, 1996. "Learning and Convergence to a Full-Information Equilibrium Are Not Equivalent," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 653-74, October.
    5. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
    6. Ginger Zhe Jin & Andrew Kato, 2007. "Dividing Online and Offline: A Case Study," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 981-1004.
    7. Uta Schönberg, 2007. "Testing for Asymmetric Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 651-691.
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    Cited by:
    1. Oren Rigbi, 2012. "The Effects of Usury Laws: Evidence from the Online Loan Market," Working Papers 1204, Ben-Gurion University of the Negev, Department of Economics.
    2. BELLEFLAMME, Paul & LAMBERT, Thomas & SCHWIENBACHER, Armin, 2011. "Crowdfunding: tapping the right crowd," CORE Discussion Papers 2011032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Benjamin Edelman, 2012. "Using Internet Data for Economic Research," Journal of Economic Perspectives, American Economic Association, vol. 26(2), pages 189-206, Spring.

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