Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?
The current banking crisis highlights the challenges faced in the traditional lending model, particularly in terms of screening smaller borrowers. The recent growth in online peer-to-peer lending marketplaces offers opportunities to examine different lending models that rely on screening by multiple peers. This paper evaluates the screening ability of lenders in such peer-to-peer markets. Our methodology takes advantage of the fact that lenders do not observe a borrower's true credit score but only see an aggregate credit category. We find that lenders are able to use available information to infer a third of the variation in creditworthiness that is captured by a borrower's credit score. This inference is economically significant and allows lenders to lend at a 140-basis-points lower rate for borrowers with (unobserved to lenders) better credit scores within a credit category. While lenders infer the most from standard banking "hard" information, they also use non-standard (subjective) information. Our methodology shows, without needing to code subjective information that lenders learn even from such "softer" information, particularly when it is likely to provide credible signals regarding borrower creditworthiness. Our findings highlight the screening ability of peer-to-peer markets and suggest that these emerging markets may provide a viable complement to traditional lending markets, especially for smaller borrowers.
|Date of creation:||Aug 2009|
|Date of revision:|
|Contact details of provider:|| Postal: 79 JFK Street, Cambridge, MA 02138|
Web page: http://www.ksg.harvard.edu/research/working_papers/index.htm
More information through EDIRC
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.:
- Michael Manove & A. Jorge Padilla & Marco Pagano, 1998.
"Collateral vs. Project Screening: A Model of Lazy Banks,"
CSEF Working Papers
10, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Manove, Michael & Padilla, Atilano Jorge & Pagano, Marco, 2000. "Collateral Vs. Project Screening: A Model Of Lazy Banks," CEPR Discussion Papers 2439, C.E.P.R. Discussion Papers.
- Manove, M. & Padilla, A.J. & Pagano, M., 1998. "Collateral vs. Project Screening: a Model of Lazy Banks," Papers 9807, Centro de Estudios Monetarios Y Financieros-.
- Boot, Arnoud W A & Thakor, Anjan, 1995.
"Financial System Architecture,"
CEPR Discussion Papers
1197, C.E.P.R. Discussion Papers.
- Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-31, July.
- Henry S. Farber & Robert Gibbons, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1007-1047.
- 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.
- Aghion, Philippe & Tirole, Jean, 1997.
"Formal and Real Authority in Organizations,"
Journal of Political Economy,
University of Chicago Press, vol. 105(1), pages 1-29, February.
- Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
- Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
- Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
- Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
- Allen N. Berger & Gregory F. Udell, 2002.
"Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure,"
Royal Economic Society, vol. 112(477), pages F32-F53, February.
- Allen N. Berger & Gregory F. Udell, 2001. "Small business credit availability and relationship lending: the importance of bank organizational structure," Finance and Economics Discussion Series 2001-36, Board of Governors of the Federal Reserve System (U.S.).
- Avery, Robert B. & Bostic, Raphael W. & Samolyk, Katherine A., 1998. "The role of personal wealth in small business finance," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1019-1061, August.
- William Adams & Liran Einav & Jonathan Levin, 2009.
"Liquidity Constraints and Imperfect Information in Subprime Lending,"
American Economic Review,
American Economic Association, vol. 99(1), pages 49-84, March.
- William Adams & Liran Einav & Jonathan Levin, 2007. "Liquidity Constraints and Imperfect Information in Subprime Lending," NBER Working Papers 13067, National Bureau of Economic Research, Inc.
- Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
- Joseph G. Altonji & Charles R. Pierret, 2001. "Employer Learning and Statistical Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 313-350.
- Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 307-362.
When requesting a correction, please mention this item's handle: RePEc:ecl:harjfk:rwp09-031. 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: ()
If references are entirely missing, you can add them using this form.