The Information Value of Online Social Networks: Lessons From Peer-to-Peer Lending

This paper provides an overview to examine the information value of online social networks in P2P lending. This article is a contribution to growing P2P literature for soft information. 
Freedman and Jin (2014 ) examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. The main finding is that borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates; however, most borrowers with social ties do not perform better ex-post. This finding suggests that lenders do not fully understand the relationship between social ties and unobserved borrower quality. The paper provides the evidence of gaming on borrower participation in social networks. Overall, the findings suggest that return-maximizing lenders should be careful in interpreting social ties within the risky pool of social borrowers.

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