Is there an effective reputation mechanism in peer-to-peer lending? Evidence from China

• Published in: Finance research letters Vol. 30; pp. 208 - 215
• Main Authors: Ding, Jie, Huang, Jinbo, Li, Yong, Meng, Meichen
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.09.2019
• Subjects: Asymmetric information; Peer-to-peer lending; Reputation mechanism; Asymmetric information; Peer-to-peer lending; G14; G11; Reputation mechanism; G29
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2018.09.015

•Using more than 178,000 borrowing listings in a Chinese online peer-to-peer (P2P) platform, we examine whether there is an effective reputation mechanism in P2P lending.•The empirical results indicate that borrowers with better historical performance can obtain loans at a higher probability and lower cost. This indicates that lenders take borrowers’ reputation as a key signal in their lending decisions. Moreover, a good reputation can reduce borrowers’ default probability.•We conclude that in P2P lending, there is an effective reputation mechanism that can discipline borrowers’ behavior. Using more than 178,000 borrowing listings in a Chinese online peer-to-peer (P2P) platform, we examine whether there is an effective reputation mechanism in P2P lending. The empirical results indicate that borrowers with better historical performance can obtain loans at a higher probability and lower cost. This indicates that lenders take borrowers’ reputation as a key signal in their lending decisions. Moreover, a good reputation can reduce borrowers’ default probability. We conclude that in P2P lending, there is an effective reputation mechanism that can discipline borrowers’ behavior.