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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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    More about this item

    Keywords

    Peer-to-peer lending; Social network; Information; Quality; Ecommerce;
    All these keywords.

    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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