[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/16855.html
   My bibliography  Save this paper

Learning by Doing with Asymmetric Information: Evidence from Prosper.com

Author

Listed:
  • 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.

Suggested Citation

  • Seth M. Freedman & Ginger Zhe Jin, 2011. "Learning by Doing with Asymmetric Information: Evidence from Prosper.com," NBER Working Papers 16855, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16855
    Note: IO
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w16855.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    2. Xavier Vives, 1993. "How Fast do Rational Agents Learn?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(2), pages 329-347.
    3. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2009. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," American Economic Review, American Economic Association, vol. 99(5), pages 1878-1898, December.
    4. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84, March.
    5. Byoung Jun & Xavier Vives, 1996. "Learning and Convergence to a Full-Information Equilibrium are not Equivalent," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 653-674.
    6. Timothy C. Salmon, 2001. "An Evaluation of Econometric Models of Adaptive Learning," Econometrica, Econometric Society, vol. 69(6), pages 1597-1628, November.
    7. Sharpe, Steven A, 1990. "Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    8. Oren Rigbi, 2013. "The Effects of Usury Laws: Evidence from the Online Loan Market," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1238-1248, October.
    9. Ginger Zhe Jin & Andrew Kato, 2007. "Dividing Online and Offline: A Case Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(3), pages 981-1004.
    10. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    11. Seth Freedman & Ginger Zhe Jin, 2008. "Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.com," Working Papers 08-43, NET Institute.
    12. Khwaja, Asim Ijaz & Iyer, Rajkamal & Luttmer, Erzo F.P. & Shue, Kelly, 2009. "Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?," Scholarly Articles 4448882, Harvard Kennedy School of Government.
    13. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    15. Uta Schönberg, 2007. "Testing for Asymmetric Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25(4), pages 651-691.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rajkamal Iyer & Asim Ijaz Khwaja & Erzo F. P. Luttmer & Kelly Shue, 2016. "Screening Peers Softly: Inferring the Quality of Small Borrowers," Management Science, INFORMS, vol. 62(6), pages 1554-1577, June.
    2. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017, January-A.
    3. repec:uts:finphd:34 is not listed on IDEAS
    4. Giovanni Ferri & Doris Neuberger, 2014. "The Banking Regulatory Bubble and How to Get out of It," Rivista di Politica Economica, SIPI Spa, issue 2, pages 39-69, April-Jun.
    5. Yeujun Yoon & Yu Li & Yan Feng, 2019. "Factors affecting platform default risk in online peer-to-peer (P2P) lending business: an empirical study using Chinese online P2P platform data," Electronic Commerce Research, Springer, vol. 19(1), pages 131-158, March.
    6. Frieden, B. Roy & Hawkins, Raymond J., 2010. "Asymmetric information and economics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(2), pages 287-295.
    7. Giuseppe Pernagallo & Benedetto Torrisi, 2020. "A theory of information overload applied to perfectly efficient financial markets," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 14(2), pages 223-236, October.
    8. Seth Freedman & Ginger Zhe Jin, 2008. "Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.com," Working Papers 08-43, NET Institute.
    9. Mingfeng Lin & Nagpurnanand R. Prabhala & Siva Viswanathan, 2013. "Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending," Management Science, INFORMS, vol. 59(1), pages 17-35, August.
    10. Qizhi Tao & Yizhe Dong & Ziming Lin, 2017. "Who can get money? Evidence from the Chinese peer-to-peer lending platform," Information Systems Frontiers, Springer, vol. 19(3), pages 425-441, June.
    11. Miller, Sarah, 2015. "Information and default in consumer credit markets: Evidence from a natural experiment," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 45-70.
    12. Enzo Dia, 2004. "Imperfect Information and Monopolistic Pricing in the Banking Industry," Working Papers 74, University of Milano-Bicocca, Department of Economics, revised May 2004.
    13. Alessandro Morselli, 2020. "Inequalities between liberal doctrine and Keynesian-oriented conventional economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 86-117,118-.
    14. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    15. D’Amato Marcello & Di Pietro Christian & Pietroluongo Mariafortuna & Sorge Marco M., 2021. "Good Co(o)p or Bad Co(o)p? Redistribution Concerns and Competition in Credit Markets with Imperfect Information," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 21(2), pages 657-694, April.
    16. Mark D. Flood & Jonathan Katz & Stephen J. Ong & Adam Smith, 2013. "Cryptography and the economics of supervisory information: balancing transparency and confidentiality," Working Papers (Old Series) 1312, Federal Reserve Bank of Cleveland.
    17. Qizhi Tao & Yizhe Dong & Ziming Lin, 0. "Who can get money? Evidence from the Chinese peer-to-peer lending platform," Information Systems Frontiers, Springer, vol. 0, pages 1-17.
    18. Robert Shimer & Ivan Werning, 2019. "Efficiency and information transmission in bilateral trading," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 154-176, July.
    19. Joseph E. Stiglitz, 1989. "Symposium on Microeconomics: 1 Reflections on the State of Economics: 1988," The Economic Record, The Economic Society of Australia, vol. 65(1), pages 66-72, March.
    20. Islam, Roumeen, 2003. "do more transparent government govern better?," Policy Research Working Paper Series 3077, The World Bank.
    21. Eric Scorsone & Stephan Weiler, 2004. "New Markets as Informational Asymmetries," Economic Development Quarterly, , vol. 18(3), pages 303-313, August.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16855. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.