Working Paper: NBER ID: w16855
Authors: Seth M. Freedman; Ginger Zhe Jin
Abstract: 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.
Keywords: P2P lending; information asymmetry; learning by doing; borrower risk; adverse selection
JEL Codes: D14; D53; D83; L15; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| early lenders systematically underestimated borrower risk (G21) | funding decisions (I22) |
| funded loans with higher rates of default (H81) | future funding behavior (D14) |
| 10 percentage point increase in late loans (G51) | likelihood of funding new loans (G21) |
| lenders learn about risks (G21) | shift towards higher credit grades (G21) |
| lower returns (below-median lenders) learn faster (G21) | adjust strategies more effectively (L21) |
| learning by doing (C90) | improve decision-making (D91) |