Skin in the Game: Evidence from the Online Social Lending Market
Speaker
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 but in which members can create self-organized groups, shows that allowing group leader rewards, similar to origination fees in securitization, is detrimental. We are able to take advantage of a change imposed on group leaders in which group rewards are eliminated to examine in a difference-in-difference approach 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. When group leaders receive an origination fee for successful loan listings, it creates adverse incentives so despite bids and endorsements, 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. The results from this experiment provide important implications for the question of how retail consumers can be protected against unscrupulous lending and thus the ongoing debate about the proper regulatory framework for consumer lending. |
| Contact information: |
| Viorel Roscovan |
