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The Information Value of Online Social Networks: Lessons from Peer-to-Peer Lending

  • Seth Freedman
  • Ginger Zhe Jin

We examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. We find that borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates; however, most borrowers with social ties do not perform better ex post. This finding suggests that lenders do not fully understand the relationship between social ties and unobserved borrower quality. We also find evidence of gaming on borrower participation in social networks. Overall, our findings suggest that return-maximizing lenders should be careful in interpreting social ties within the risky pool of social borrowers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19820.

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Date of creation: Jan 2014
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Handle: RePEc:nbr:nberwo:19820
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  1. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
  2. Feigenberg, Benjamin & Field, Erica Marie & Pande, Rohini, 2010. "Building Social Capital Through Microfinance," Scholarly Articles 4449105, Harvard Kennedy School of Government.
  3. Kosuke Uetake & Ken ONISHI & Kei Kawai, 2013. "Signaling in Online Credit Markets," 2013 Meeting Papers 516, Society for Economic Dynamics.
  4. Daniel Paravisini & Veronica Rappoport & Enrichetta Ravina, 2010. "Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios," NBER Working Papers 16063, National Bureau of Economic Research, Inc.
  5. Dean Karlan, 2004. "Using experimental economics to measure social capital and predict financial decisions," Artefactual Field Experiments 00074, The Field Experiments Website.
  6. Seth M. Freedman & Ginger Zhe Jin, 2011. "Learning by Doing with Asymmetric Information: Evidence from Prosper.com," NBER Working Papers 16855, National Bureau of Economic Research, Inc.
  7. Rafael Gomez & Eric Santor, 2003. "Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data," Working Papers 03-33, Bank of Canada.
  8. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262014106, June.
  9. Ajay K. Agrawal & Christian Catalini & Avi Goldfarb, 2011. "The Geography of Crowdfunding," NBER Working Papers 16820, National Bureau of Economic Research, Inc.
  10. Andrew Kato & Ginger Jin, 2004. "Dividing online and offline: A case study," Natural Field Experiments 00276, The Field Experiments Website.
  11. Gregory Lewis, 2011. "Asymmetric Information, Adverse Selection and Online Disclosure: The Case of eBay Motors," American Economic Review, American Economic Association, vol. 101(4), pages 1535-46, June.
  12. Karlan, Dean & Gine, Xavier, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 61, Yale University, Department of Economics.
  13. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
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