Friendship in Online Peer-to-Peer Lending: Pipes, Prisms, and Relational Herding

This paper investigates how friendship relationships act as pipes, prisms, and herding signals in a large online, peer-to-peer (P2P) lending site. By analyzing decisions of lenders, we find that friends of the borrower, especially close offline friends, act as financial pipes by lending money to the borrower. On the other hand, the prism effect of friends' endorsements via bidding on a loan negatively affects subsequent bids by third parties. However, when offline friends of a potential lender, especially close friends, place a bid, a relational herding effect occurs as potential lenders are likely to follow their offline friends with a bid.

[1]  Judith Donath,et al.  Public Displays of Connection , 2004 .

[2]  Stephen Coate,et al.  Group lending, repayment incentives and social collateral , 1995 .

[3]  Byungtae Lee,et al.  From the wisdom of crowds to my own judgment in microfinance through online peer-to-peer lending platforms , 2012, Electron. Commer. Res. Appl..

[4]  M. Spence.  Signaling in Retrospect and the Informational Structure of Markets , 2002 .

[5]  Mark S. Granovetter.  Economic Action and Social Structure: The Problem of Embeddedness , 1985, American Journal of Sociology.

[6]  A. Silver,et al.  Friendship in Commercial Society: Eighteenth-Century Social Theory and Modern Sociology , 1990, American Journal of Sociology.

[7]  Rick L. Andrews,et al.  Strategic Herding Behavior in Peer-to-Peer Loan Auctions , 2010 .

[8]  Noah E. Friedkin,et al.  Social Influence Network Theory: A Sociological Examination of Small Group Dynamics , 2011 .

[9]  Sanjeev Kumar,et al.  Bank of One: Empirical Analysis of Peer-to-Peer Financial Marketplaces , 2007, AMCIS.

[10]  Byungtae Lee,et al.  Herding behavior in online P2P lending: An empirical investigation , 2012, Electron. Commer. Res. Appl..

[11]  F. Heider.  The psychology of interpersonal relations , 1958 .

[12]  A. Banerjee,et al.  A Simple Model of Herd Behavior , 1992 .

[13]  M. Argyle,et al.  The Rules of Friendship , 1984 .

[14]  I. Welch.  Sequential Sales, Learning, and Cascades , 1992 .

[15]  Cameron Marlow,et al.  A 61-million-person experiment in social influence and political mobilization , 2012, Nature.

[16]  Bin Gu,et al.  Informational Cascades and Software Adoption on the Internet: An Empirical Investigation , 2008, MIS Q..

[17]  Toby E. Stuart,et al.  Interorganizational Endorsements and the Performance of Entrepreneurial Ventures , 1999 .

[18]  David Godes,et al.  Firm-Created Word-of-Mouth Communication: Evidence from a Field Test , 2009, Mark. Sci..

[19]  Jonathan E. Butner,et al.  Compliance with a Request in Two Cultures: The Differential Influence of Social Proof and Commitment/Consistency on Collectivists and Individualists , 1999 .

[20]  Ohad Barzilay,et al.  Playing Both Sides of the Market: Success and Reciprocity on Crowdfunding Platforms , 2015, ICIS.

[21]  I. Welch,et al.  Rational herding in financial economics , 1996 .

[22]  Mark S. Granovetter.  The Strength of Weak Ties , 1973, American Journal of Sociology.

[23]  Daniel J. Brass.  A Social Network Perspective on Organizational Psychology , 2012 .

[24]  Siva Viswanathan,et al.  Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending , 2011, Manag. Sci..

[25]  Daniel J. Brass,et al.  Taking Stock of Networks and Organizations: A Multilevel Perspective , 2004 .

[26]  Peng Liu,et al.  Rational Herding in Microloan Markets , 2012, Manag. Sci..

[27]  S. Bikhchandani,et al.  Herd Behavior in Financial Markets , 2000, IMF Staff Papers.

[28]  B. Uzzi,et al.  Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing , 1999, The New Economic Sociology.

[29]  Sergio Herrero-Lopez,et al.  Lending Behavior and Community Structure in an Online Peer-to-Peer Economic Network , 2009, 2009 International Conference on Computational Science and Engineering.

[30]  Joel Podolny.  Networks as the Pipes and Prisms of the Market1 , 2001, American Journal of Sociology.

[31]  S. Bikhchandani,et al.  You have printed the following article : A Theory of Fads , Fashion , Custom , and Cultural Change as Informational Cascades , 2007 .

[32]  J. Stiglitz,et al.  Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring? , 1991 .

[33]  George A. Akerlof.  The Market for “Lemons”: Quality Uncertainty and the Market Mechanism , 1970 .

[34]  Anindya Ghose,et al.  An Empirical Examination of the Antecedents and Consequences of Contribution Patterns in Crowd-Funded Markets , 2013, Inf. Syst. Res..

[35]  Thomas W. Valente.  Network models of the diffusion of innovations , 1996, Comput. Math. Organ. Theory.

[36]  T. Valente,et al.  Network models of the diffusion of innovations , 1995, Comput. Math. Organ. Theory.

[37]  Mark S. Granovetter.  The Impact of Social Structure on Economic Outcomes Social Networks and Economic Outcomes: Core Principles , 2022 .

[38]  Gerald C. Kane,et al.  What's Different about Social Media Networks? A Framework and Research Agenda , 2014, MIS Q..

[39]  Gustavo S. Mesch,et al.  The Quality of Online and Offline Relationships: The Role of Multiplexity and Duration of Social Relationships , 2006, Inf. Soc..

[40]  Dan Ariely,et al.  When Rational Sellers Face Nonrational Buyers: Evidence from Herding on eBay , 2008, Manag. Sci..

[41]  Jonathon N. Cummings,et al.  The quality of online social relationships , 2002, CACM.

[42]  Mark S. Granovetter.  Getting a Job: A Study of Contacts and Careers , 1974 .

[43]  R. Cialdini.  Influence: The Psychology of Persuasion , 1993 .

[44]  Arun Sundararajan,et al.  The Visible Hand? Demand Effects of Recommendation Networks in Electronic Markets , 2012, Manag. Sci..

[45]  Craig R. Everett.  Group Membership, Relationship Banking and Loan Default Risk: The Case of Online Social Lending , 2015 .

[46]  Bin Gu,et al.  Social Influence and Defaults in Peer-to-Peer Lending Networks , 2012, ICIS.

[47]  L. Festinger,et al.  A Theory of Cognitive Dissonance , 2017 .

[48]  G. Jin,et al.  Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.Com , 2008 .

[49]  S. Viswanathan,et al.  Home Bias in Online Investments: An Empirical Study of an Online Crowdfunding Market , 2014 .

[50]  D. Krackhardt,et al.  Bringing the Individual Back in: A Structural Analysis of the Internal Market for Reputation in Organizations , 1994 .

[51]  T. Newcomb.  The acquaintance process , 1961 .

[52]  J. Stiglitz,et al.  The Great Transformation: The Political and Economic Origins of Our Time , 2001 .