Is there an effective reputation mechanism in peer-to-peer lending? Evidence from China

Abstract Using more than 178,000 borrowing listings in a Chinese online peer-to-peer (P2P) platform, we examine whether there is an effective reputation mechanism in P2P lending. The empirical results indicate that borrowers with better historical performance can obtain loans at a higher probability and lower cost. This indicates that lenders take borrowers’ reputation as a key signal in their lending decisions. Moreover, a good reputation can reduce borrowers’ default probability. We conclude that in P2P lending, there is an effective reputation mechanism that can discipline borrowers’ behavior.

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