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Decisions under Uncertainty in Decentralized Online Markets: Empirical Studies of Peer-to-Peer Lending and Outsourcing

I study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace – Prosper.com, I test whether a borrower's online social networks can help mitigate information asymmetry between borrowers and lenders, focusing on the distinction between the structural and relational aspects of networks. While the structural aspects have limited to no significance, the relational aspects are consistently significant predictors of lending outcomes, with a striking gradation based on the verifiability and visibility of a borrower's social capital. Stronger and more verifiable relational network measures are associated with a higher likelihood of a loan being funded and lower interest rates for the borrowers, and lower risks of default for lenders. I discuss the implications of my findings for the disintermediation of financial markets and the design of decentralized electronic markets. 1 An earlier version of this study was published in the Proceedings of the 30 International Conference on Information Systems (Lin, Prabhala & Viswanathan 2009).