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Xin Xue – UVa Econ – Brown Bag Series
29 October 2018 @ 1:30 pm - 2:30 pm
I examine how lending platforms use their information advantage to deter adverse selection in their competition for creditworthy borrowers. Using data from peer-to-peer lending platforms and a platform entry event which exogenously in-duces platform competition for both borrowers and lenders, I find that the incumbent platform possesses an information advantage by incorporating information that cannot be leveraged by the entrant into borrower screening and loan pricing. I show that, with better knowledge about the borrowers’ quality, the incumbent platform attenuates its own adverse selection by aggressively undercutting loan prices for creditworthy borrowers, leaving a less favorable borrower composition and thus exacerbating entrant’s adverse selection. Lenders on the incumbent platform free ride on its information advantage, while to compensate for information disadvantage, those on the entrant demand higher ex-ante loan prices.