Rational Herding in Microloan Markets
Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel data set that tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders. Well-funded borrower listings tend to attract more funding after we control for unobserved listing heterogeneity and payoff externalities. Moreover, instead of passively mimicking their peers (irrational herding), lenders engage in active observational learning (rational herding); they infer the creditworthiness of borrowers by observing peer lending decisions and use publicly observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Similarly, favorable borrower characteristics (e.g., friend endorsements) weaken the herding effect, as lenders attribute herding to these observable merits. Follow-up analysis shows that rational herding beats irrational herding in predicting loan performance. This paper was accepted by Pradeep Chintagunta, marketing.
Volume (Year): 58 (2012)
Issue (Month): 5 (May)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992.
"A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades,"
Journal of Political Economy,
University of Chicago Press, vol. 100(5), pages 992-1026, October.
- Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
- Charles F. Manski, 1993.
"Identification of Endogenous Social Effects: The Reflection Problem,"
Review of Economic Studies,
Oxford University Press, vol. 60(3), pages 531-542.
- Manski, C.F., 1991. "Identification of Endogenous Social Effects: the Reflection Problem," Working papers 9127, Wisconsin Madison - Social Systems.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
- Yongheng Deng & Peng Liu, 2009. "Mortgage Prepayment and Default Behavior with Embedded Forward Contract Risks in China’s Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 38(3), pages 214-240, April.
- Hongbin Cai & Yuyu Chen & Hanming Fang, 2009.
"Observational Learning: Evidence from a Randomized Natural Field Experiment,"
American Economic Review,
American Economic Association, vol. 99(3), pages 864-882, June.
- Hongbin Cai & Yuyu Chen & Hanming Fang, 2007. "Observational Learning: Evidence from a Randomized Natural Field Experiment," NBER Working Papers 13516, National Bureau of Economic Research, Inc.
- Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
- Paul R. Milgrom, 1979.
"Good Nevs and Bad News: Representation Theorems and Applications,"
407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
- Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
- Wesley Hartmann & Puneet Manchanda & Harikesh Nair & Matthew Bothner & Peter Dodds & David Godes & Kartik Hosanagar & Catherine Tucker, 2008. "Modeling social interactions: Identification, empirical methods and policy implications," Marketing Letters, Springer, vol. 19(3), pages 287-304, December.
- Peter N. Golder & Gerard J. Tellis, 2004. "Growing, Growing, Gone: Cascades, Diffusion, and Turning Points in the Product Life Cycle," Marketing Science, INFORMS, vol. 23(2), pages 207-218, December.
- Khwaja, Asim Ijaz & Iyer, Rajkamal & Luttmer, Erzo F.P. & Shue, Kelly, 2009.
"Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?,"
4448882, Harvard Kennedy School of Government.
- Iyer, Rajkamal & Khwaja, Asim Ijaz & Luttmer, Erzo F. P. & Shue, Kelly, 2009. "Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?," Working Paper Series rwp09-031, Harvard University, John F. Kennedy School of Government.
- Wooldridge, Jeffrey M., 1999.
"Distribution-free estimation of some nonlinear panel data models,"
Journal of Econometrics,
Elsevier, vol. 90(1), pages 77-97, May.
- Wooldridge, J.M., 1990. "Distribution-Free Estimation Of Some Nonlinear Panel Data Models," Working papers 564, Massachusetts Institute of Technology (MIT), Department of Economics.
- Uri Simonsohn & Dan Ariely, 2008. "When Rational Sellers Face Nonrational Buyers: Evidence from Herding on eBay," Management Science, INFORMS, vol. 54(9), pages 1624-1637, September.
- J. Miguel Villas-Boas & Russell S. Winer, 1999. "Endogeneity in Brand Choice Models," Management Science, INFORMS, vol. 45(10), pages 1324-1338, October.
- Bogaçhan Çelen & Shachar Kariv, 2004. "Distinguishing Informational Cascades from Herd Behavior in the Laboratory," American Economic Review, American Economic Association, vol. 94(3), pages 484-498, June.
- Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
- Anita Elberse & Jehoshua Eliashberg, 2003. "Demand and Supply Dynamics for Sequentially Released Products in International Markets: The Case of Motion Pictures," Marketing Science, INFORMS, vol. 22(3), pages 329-354.
- Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, vol. 87(5), pages 847-862, December.
- Catherine Tucker & Juanjuan Zhang, 2011. "How Does Popularity Information Affect Choices? A Field Experiment," Management Science, INFORMS, vol. 57(5), pages 828-842, May.
- Rachel Croson & Jen Shang, 2008.
"The impact of downward social information on contribution decisions,"
Springer;Economic Science Association, vol. 11(3), pages 221-233, September.
- Rachel Croson & Jen Shang, 2008. "The impact of downward social information on contribution decisions," Natural Field Experiments 00322, The Field Experiments Website.
- Young Han Lee & Ulrike Malmendier, 2007.
"The Bidder's Curse,"
NBER Working Papers
13699, National Bureau of Economic Research, Inc.
- Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
- Pradeep K. Chintagunta, 2001. "Endogeneity and Heterogeneity in a Probit Demand Model: Estimation Using Aggregate Data," Marketing Science, INFORMS, vol. 20(4), pages 442-456, December.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, "undated". "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Juanjuan Zhang, 2010. "The Sound of Silence: Observational Learning in the U.S. Kidney Market," Marketing Science, INFORMS, vol. 29(2), pages 315-335, 03-04.
- Martin Farnham & Lucie Schmidt & Purvi Sevak, 2011. "House Prices and Marital Stability," American Economic Review, American Economic Association, vol. 101(3), pages 615-619, May.
- Wilfred Amaldoss & Sanjay Jain, 2010. "Reference Groups and Product Line Decisions: An Experimental Investigation of Limited Editions and Product Proliferation," Management Science, INFORMS, vol. 56(4), pages 621-644, April.
- Devin G. Pope & Justin R. Sydnor, 2011. "What’s in a Picture?: Evidence of Discrimination from Prosper.com," Journal of Human Resources, University of Wisconsin Press, vol. 46(1), pages 53-92.
- Seth Freedman & Ginger Zhe Jin, 2008. "Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.com," Working Papers 08-43, NET Institute.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:58:y:2012:i:5:p:892-912. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.