Essays in Peer-to-Peer Lending

Online lending marketplaces are increasingly growing as an alternative source of finance. This thesis examines online lending marketplaces in the United States. It specifically focuses on peer-to-peer lending, one of the products offered by online marketplaces. First, this thesis examines the extent to which the absence of banks in the local market impacts the growth of online lending marketplaces. We provide evidence that online lending marketplaces increase access to finance in areas that are underserved by the traditional banking system. Furthermore, online lending marketplaces do not increase market frictions that could exist as a result of bank’s absence in the local market. In addition, peer-to-peer lending help borrowers improve their financial position. Second, this thesis studies the benefits of social capital for individuals in peer-to-peer lending. We find that social capital benefits borrowers in peer-to-peer lending through having a lower interest rate. Furthermore, we find that the effect of social capital is stronger for borrowers who are more susceptible to moral hazard. This implies that social capital is effective at mitigating market frictions. Our results also show that social capital constrains opportunistic behavior. An increase in region’s social capital is associated with a lower likelihood of default. Last, we examine the extent to which the presence of income rounding behavior in peer-to-peer lending affects loan performance and borrower’s credit position. We find that the occurrence of rounding behavior is associated with a higher risk of default and negative changes in borrower’s credit score. Furthermore, we find that investors are not compensated for the increased risk associated with rounding. Borrowers who round their income receive a significantly lower interest rate than those who do not round.