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The information value of online social networks: Lessons from peer-to-peer lending

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  • Freedman, Seth
  • Jin, Ginger Zhe

Abstract

We examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. We find that borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates; however, most borrowers with social ties are more likely to pay late or default. We provide evidence that these findings are driven by lenders not fully understanding the relationship between social ties and unobserved borrower quality. Overall, our findings suggest caution for using online social networks as a signal of quality in anonymous transactions.

Suggested Citation

  • Freedman, Seth & Jin, Ginger Zhe, 2017. "The information value of online social networks: Lessons from peer-to-peer lending," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 185-222.
  • Handle: RePEc:eee:indorg:v:51:y:2017:i:c:p:185-222
    DOI: 10.1016/j.ijindorg.2016.09.002
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    Cited by:

    1. Eid, Nourhan & Maltby, Josephine & Talavera, Oleksandr, 2016. "Income Rounding and Loan Performance in the Peer-to-Peer Market," MPRA Paper 72852, University Library of Munich, Germany.
    2. Michal Polena & Tobias Regner, 2016. "Determinants of borrowers' default in P2P lending under consideration of the loan risk class," Jena Economic Research Papers 2016-023, Friedrich-Schiller-University Jena.
    3. Carlotta MARIOTTO & Marianne VERDIER, 2015. "Innovation and Competition in Internet and Mobile Banking: an Industrial Organization Perspective," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(99), pages 129-146, 3rd quart.
    4. repec:ksa:szemle:1754 is not listed on IDEAS
    5. Karami, Moein & Cumming, Douglas & Hornuf, Lars & Schweizer, Denis, 2017. "Disentangling Crowdfunding from Fraudfunding," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168120, Verein für Socialpolitik / German Economic Association.
    6. Adair Morse, 2015. "Peer-to-Peer Crowdfunding: Information and the Potential for Disruption in Consumer Lending," NBER Working Papers 20899, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Peer-to-peer lending; Social network; Information; Quality; Ecommerce;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • G1 - Financial Economics - - General Financial Markets

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