Social Networks and Supply and Demand on Online Lending Marketplaces

Abstract

We show that social networks (Facebook connections) impact both the demand for and supply of consumer and small business loans originated on lending marketplaces. Loan demand increases substantially with past borrowing activities of geographically distant but socially connected areas, with an elasticity of 0.37. Borrower-area social connectedness increases funding likelihood by 8.11% and improves ex-post loan performance. We establish causality by utilizing exogenous demand-side shocks from natural disasters and supply-side lending capacity variations associated with housing price fluctuations. Social networks improve capital allocation by increasing the awareness of alternative lending platforms and facilitating the transmission of less accessible information complementary to loan-specific data.