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Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending

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Listed:
  • Mingfeng Lin

    (Eller College of Management, University of Arizona, Tucson, Arizona 85721)

  • Nagpurnanand R. Prabhala

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Siva Viswanathan

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

Abstract

We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets. This paper was accepted by Sandra Slaughter, information systems.

Suggested Citation

  • Mingfeng Lin & Nagpurnanand R. Prabhala & Siva Viswanathan, 2013. "Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending," Management Science, INFORMS, vol. 59(1), pages 17-35, August.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:1:p:17-35
    DOI: 10.1287/mnsc.1120.1560
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