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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. 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.
  2. Jun, Byoung & Vives, Xavier, 1996. "Learning and Convergence to a Full-Information Equilibrium Are Not Equivalent," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 653-74, October.
  3. Francois Ortalo-Magne & Aviv Nevo & Igal Hendel, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," 2007 Meeting Papers 89, Society for Economic Dynamics.
  4. Uta Schönberg, 2007. "Testing for Asymmetric Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 651-691.
  5. Vives, X., 1990. "How Fast Do Rational Agents Learn?," UFAE and IAE Working Papers 135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
  7. Andrew Kato & Ginger Jin, 2004. "Dividing online and offline: A case study," Natural Field Experiments 00276, The Field Experiments Website.
  8. Timothy C. Salmon, 2001. "An Evaluation of Econometric Models of Adaptive Learning," Econometrica, Econometric Society, vol. 69(6), pages 1597-1628, November.
  9. 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.).
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