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Author Hildebr, Thomas ♦ Puri, Manju ♦ Rocholl, Jörg
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Group Leader ♦ Origination Fee ♦ Incentive Structure ♦ Online Social Lending ♦ Financial Intermediary ♦ Default Rate ♦ Comparable Borrower ♦ Originate-to-distribute Model ♦ Loan Participation ♦ Group Leader Reward ♦ Lending Market ♦ Interest Rate ♦ Self-organized Group ♦ Borrower Default ♦ Successful Loan Listing ♦ Certification Mechanism ♦ Ongoing Debate ♦ Online Social Lending Market ♦ Natural Experiment ♦ Adverse Incentive ♦ Group Reward ♦ Important Implication
Abstract This paper analyzes the certification mechanisms and incentives that enable lending markets to match demand and supply despite the absence of financial intermediaries with skin in the game. Our analysis of the online social lending market, in which there is no financial intermediary, shows that the creation of self-organized groups helps the market to work efficiently but allowing group leader rewards, similar to origination fees in securitization, is detrimental. We are able to take advantage of a natural experiment in which group rewards are eliminated to examine how the same groups behave once these origination fees are removed. In general, group leaders signal borrower quality to other lenders by endorsing and submitting bids for listings in their groups. Borrowers in these groups have a significantly higher likelihood of receiving a loan, pay significantly lower interest rates, and default less often than comparable borrowers outside groups. However, when group leaders receive an origination fee for successful loan listings, it creates adverse incentives so despite bids and endorsement, loans originated by such group leaders have higher default rates. Group leaders become more careful in screening after the elimination of these rewards, and if their loan participation is high, i.e. when they have skin in the game and are thus severely hurt by a borrower default. These results have important implications for the question of how lending markets can function properly and for the ongoing debate about the future of securitization and the originate-to-distribute model.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Learning Resource Type Article
Publisher Date 2010-01-01