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Peer-to-Peer Lending, Joint Liability and Financial Inclusion with Altruistic Investors

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  • Berentsen, Aleksander
  • Markheim, Marina

Abstract

Peer-to-peer lending platforms are increasingly important alternatives to traditional forms of credit intermediation. These platforms attract projects that appeal to socially motivated investors. There are high hopes that these novel forms of credit intermediation improve financial inclusion and provide better terms for borrowers. To study these hopes, we introduce altruistic investors into a peer-to-peer model of credit intermediation where the terms of the loans are determined through bilateral bargaining. We find that altruistic investors do not improve financial inclusion in the sense that all projects that are financed by altruistic investors are also financed by rational investors. Altruistic investors offer, however, better borrowing conditions in the sense that the borrowing rates with altruistic investors are always lower in comparison to the ones obtained with rational investors. Furthermore, investors with strong altruistic preferences are willing to finance projects which generate an expected financial loss. We also introduce joint liability contracts and we find that they increase borrowing rates and have no effects on the surpluses of borrowers and investors. Finally, for a certain range of parameters the model’s allocation is observationally equivalent to a model with rational investors that have low bargaining power. Outside of this range, the model generates equilibrium allocations that are not incentive feasible in a model with rational investors which is interesting from the point of view of pure bargaining theory.

Suggested Citation

  • Berentsen, Aleksander & Markheim, Marina, 2019. "Peer-to-Peer Lending, Joint Liability and Financial Inclusion with Altruistic Investors," MPRA Paper 94963, University Library of Munich, Germany, revised 02 Jul 2019.
  • Handle: RePEc:pra:mprapa:94963
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    References listed on IDEAS

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    1. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
    2. David K. Levine, 1998. "Modeling Altruism and Spitefulness in Experiment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 593-622, July.
    3. Arno Riedl & Paul Smeets, 2017. "Why Do Investors Hold Socially Responsible Mutual Funds?," Journal of Finance, American Finance Association, vol. 72(6), pages 2505-2550, December.
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    1. Berentsen, Aleksander & Markheim, Marina, 2020. "Peer-to-Peer Lending and Financial Inclusion with Altruistic Investors," MPRA Paper 102277, University Library of Munich, Germany.

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    More about this item

    Keywords

    altruistic preferences; financial intermediation; financial inclusion; peer-to-peer platforms; joint liability;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G0 - Financial Economics - - General
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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