Information Asymmetry among Investors and Strategic Bidding in Peer-to-Peer Lending

Peer-to-peer (P2P) lending became a global phenomenon in recent years. Despite their prominence in the “FinTech” era, P2P platforms remain a risky investment because of the high default rate of unsecured personal loans funded on such platforms. In contrast, the rate of return can be much higher than that of other investments if P2P loans are repaid. Therefore, investors of P2P loans need information about borrowers’ ability to repay. An important channel is to learn from other investors who may have information advantages. We argue that, because collective effort from investors is required in P2P lending, it could be optimal for informed investors to bid early in projects with the purpose of signaling the quality. With a unique data set from Prosper.com, we find that informed investors are indeed more likely to bid in the early stage of a project with a low probability of being funded, whereas uninformed investors will follow. The “squatting” behavior (early bidding) of informed investors facilitates information spillover to uninformed investors, benefitting the investors and borrowers who otherwise may not raise sufficient funding. Our findings also have implications for P2P lending platforms on how to manage the information asymmetry and strategic behaviors of investors.