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Learning by Doing with Asymmetric Information: Evidence from Prosper.com

  • Seth M. Freedman
  • Ginger Zhe Jin

Using peer-to-peer (P2P) lending as an example, we show that learning by doing plays an important role in alleviating the information asymmetry between market players. Although the P2P platform (Prosper.com) discloses part of borrowers' credit histories, lenders face serious information problems because the market is new and subject to adverse selection relative to offline markets. We find that early lenders did not fully understand the market risk but lender learning is effective in reducing the risk over time. As a result, the market excludes more and more sub-prime borrowers and evolves towards the population served by traditional credit markets.

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File URL: http://www.nber.org/papers/w16855.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16855.

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Date of creation: Mar 2011
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Handle: RePEc:nbr:nberwo:16855
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  1. 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?," Scholarly Articles 4448882, Harvard Kennedy School of Government.
  2. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
  3. Uta Schönberg, 2007. "Testing for Asymmetric Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 651-691.
  4. Timothy C. Salmon, 2001. "An Evaluation of Econometric Models of Adaptive Learning," Econometrica, Econometric Society, vol. 69(6), pages 1597-1628, November.
  5. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  6. Xavier Vives, 1993. "How Fast do Rational Agents Learn?," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 329-347.
  7. 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.
  8. Oren Rigbi, 2013. "The Effects of Usury Laws: Evidence from the Online Loan Market," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1238-1248, October.
  9. Ginger Zhe Jin & Andrew Kato, 2007. "Dividing Online and Offline: A Case Study," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 981-1004.
  10. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2009. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," American Economic Review, American Economic Association, vol. 99(5), pages 1878-98, December.
  11. Byoung Jun & Xavier Vives, 1996. "Learning and Convergence to a Full-Information Equilibrium are not Equivalent," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 653-674.
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