How Lending Experience and Borrower Credit Influence Rational Herding Behavior in Peer-to-Peer Microloan Platform Markets

Paul Benjamin LOWRY, Junji XIAO, Jia YUAN*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

Abstract

This paper analyzes the herding behavior that characterizes lenders’ lending decisions on a microloan platform and explains how rational herding behavior can resolve the information-asymmetry problem, which is a well-known reason for the failure of online microloan platforms. Using a set of panel data on individual lending decisions acquired from Paipaidai.com (PPDai), an online microloan platform, we examine the influence of the lending decisions of prominent, experienced lenders on novice lenders to identify rational herding behavior. Our empirical analysis demonstrates that rational herding behavior can in fact efficiently reduce lender loss from borrower defaults caused by limited information. Although it is typically assumed that herding behavior is irrational, we find that it can be rational in this context and can thus shed light on why PPDai has succeeded while most other microloan platforms have failed. Accordingly, we make three key contributions: 1) we use heterogeneous herding effects to empirically determine whether lenders’ herding behavior on PPDai is rational based on observational learning; 2) we investigate the moderating effect of borrower credit and novice-lender experience on herding, and we leverage this heterogeneity in lender experience to better explain loan results; and 3) because PPDai publicly provides potential lenders with a transparent credit score—in contrast to platforms like Prosper.com, which leverage hidden proprietary credit information from Experian—we further analyze the credit composition of prominent lenders to better understand the crucial determinants of rational herding. In fact, our follow-up survival simulations indicate that without rational herding, the total number of successful PPDai loans would have decreased by around 46 percent during the study period—a finding that further underlines the crucial influence of rational herding and the unique contextual factors of PPDai that have fostered it.

Original languageEnglish
Pages (from-to)914-952
Number of pages39
JournalJournal of Management Information Systems
Volume40
Issue number3
Early online date23 Aug 2023
DOIs
Publication statusPublished - 2023

Bibliographical note

Publisher Copyright:
© 2023 Taylor & Francis Group, LLC.

Authors are listed in alphabetical order and authorship was equally shared.

Keywords

  • herding behavior
  • information asymmetry
  • microloan platforms
  • microloans
  • online platforms
  • Peer-to-peer transactions
  • rational herding

Fingerprint

Dive into the research topics of 'How Lending Experience and Borrower Credit Influence Rational Herding Behavior in Peer-to-Peer Microloan Platform Markets'. Together they form a unique fingerprint.

Cite this