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Platform Mispricing and Lender Learning in Peer-to-Peer Lending

Author

Listed:
  • Xinyuan Liu

    (University of Arizona)

  • Zaiyan Wei

    (Purdue University)

  • Mo Xiao

    (University of Arizona)

Abstract

We document how online lenders exploit a flawed, new pricing mechanism in a peer-to-peer lending platform: Prosper.com. Switching from auctions to a posted-price mechanism in December 2010, Prosper assigned loan listings with different estimated loss rates into seven distinctive rating grades and adopted a single price for all listings with the same rating grade. We show that lenders adjusted their investment portfolios towards listings at the low end of the risk spectrum of each Prosper rating grade. We find heterogeneity in the speed of adjustment by lender experience, investment size, and diversification strategies. It took about 16–17 months for an average lender to take full advantage of the “cherry-picking” opportunity under the single-price regime, which is roughly when Prosper switched to a more flexible pricing mechanism.

Suggested Citation

  • Xinyuan Liu & Zaiyan Wei & Mo Xiao, 2020. "Platform Mispricing and Lender Learning in Peer-to-Peer Lending," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(2), pages 281-314, March.
    • Handle: RePEc:kap:revind:v:56:y:2020:i:2:d:10.1007_s11151-019-09733-2
    DOI: 10.1007/s11151-019-09733-2
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    More about this item

    Keywords

    Firm learning; Pricing mechanisms; Peer-to-peer lending;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G4 - Financial Economics - - Behavioral Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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