Working Paper: NBER ID: w19820
Authors: Seth Freedman; Ginger Zhe Jin
Abstract: 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 are more likely to pay late or default. We provide evidence that these findings are driven by lenders not fully understanding the relationship between social ties and unobserved borrower quality. Overall, our findings suggest caution for using online social networks as a signal of quality in anonymous transactions.
Keywords: Peer-to-peer lending; social networks; information asymmetry
JEL Codes: D53; D82; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lenders' perception of social ties (G21) | funding decisions (I22) |
| endorsements from friends (M37) | repayment outcomes (G51) |
| group characteristics (C92) | loan outcomes (G51) |
| social ties (Z13) | loan funding likelihood (G51) |
| social ties (Z13) | interest rates (E43) |
| social ties (Z13) | repayment rates (G51) |