Screening Peers Softly: Inferring the Quality of Small Borrowers

Do P2P lenders smarter than credit agency?  Iyer et al. (2016) examine the performance of new online lending markets that rely on non-expert individuals to screen their peers’ creditworthiness. The P2P lenders predict an individual’s likelihood of defaulting on a loan with 45% greater accuracy than the borrower’s exact credit score (unobserved by the lenders, who only see a credit category). Moreover, these lenders achieve 87% of the predictive power of an econometrician who observes all standard financial information about borrowers. Screening through soft or nonstandard information is relatively more important when evaluating lower-quality borrowers. The P2P markets with non- expert individuals can effectively screen for borrower creditworthiness. Individuals collectively perform well in solving a problem that is generally thought to be best left to experts with access to “hard verified data.”

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