Search and herding effects in peer-to-peer lending: evidence from prosper.com

I examine loan data from Prosper.com—a website which allows borrowers to post loans and for lenders to bid on those loans. The Prosper market somewhat resembles the theoretical model of search, herding, and crowding in a large market described in Berkovich and Tayon (Phd. dissertation—Essays on search and herding. University of Pennsylvania, Pennsylvania, 2009). That model predicts that assets with high and low prices have high variance in the difference between price and true value. These extreme price regions of the asset-space are where private information provides excess returns. In the Prosper market, I find some evidence for the model since loans with low ex post returns show higher variance of the difference between price and ex post return. I also find that high-priced loans provide excess returns even after accounting for risk-aversion.