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

Listed author(s):
  • 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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File URL: http://www.nber.org/papers/w19820.pdf
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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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Length:
Date of creation: Jan 2014
Publication status: published as Seth Freedman & Ginger Zhe Jin, 2017. "The information value of online social networks: Lessons from peer-to-peer lending," International Journal of Industrial Organization, vol 51, pages 185-222.
Handle: RePEc:nbr:nberwo:19820
Note: IO
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  1. Veronica Rappoport & Enrichetta Ravina & Daniel Paravisini, 2010. "Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios," 2010 Meeting Papers 664, Society for Economic Dynamics.
  2. Catherine Tucker, 2010. "Social Networks, Personalized Advertising, and Privacy Controls," Working Papers 10-07, NET Institute.
  3. 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 1535-1546, June.
  4. Benjamin Feigenberg & Erica M. Field & Rohini Pande, 2010. "Building Social Capital Through MicroFinance," NBER Working Papers 16018, National Bureau of Economic Research, Inc.
  5. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  6. repec:pri:rpdevs:gamespaper.pdf is not listed on IDEAS
  7. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  8. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," Working Papers 182, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  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. Rafael Gomez & Eric Santor, 2003. "Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data," Staff Working Papers 03-33, Bank of Canada.
  11. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1688-1699, December.
  12. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262014106, July.
  13. Xavier Giné & Dean Karlan, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 970, Economic Growth Center, Yale University.
  14. Kosuke Uetake & Ken ONISHI & Kei Kawai, 2013. "Signaling in Online Credit Markets," 2013 Meeting Papers 516, Society for Economic Dynamics.
  15. 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.
  16. 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.
  17. Ajay K. Agrawal & Christian Catalini & Avi Goldfarb, 2011. "The Geography of Crowdfunding," NBER Working Papers 16820, National Bureau of Economic Research, Inc.
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