Adverse Selection in Credit Certificates: Evidence from a Peer-to-Peer Lending Platform

59 Pages Posted: 25 Jan 2019 Last revised: 10 Dec 2020

See all articles by Maggie Hu

Maggie Hu

The Chinese University of Hong Kong

Xiaoyang Li

The Chinese University of Hong Kong (CUHK)

Yang Shi

The Chinese University of Hong Kong (CUHK)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2020

Abstract

Peer-to-Peer lending platforms encourage borrowers to obtain various credit certificates for information disclosure. Using unique data from one of China’s largest Peer-to-Peer platforms, we show that borrowers of lower credit quality obtain more certificates to boost their credit profiles, while higher-quality ones do not. Uninformed credulous lenders take these nearly costless certificates as a positive signal to guide their investments. Consequently, loans applied by borrowers with more credit certificates have higher funding success but worse repayment performance. Overall, we document credit certificates fail to accurately signal borrowers’ qualities due to adverse selection, resulting in distorted credit allocation and investment inefficiency

Keywords: P2P lending; Credit allocation; Adverse selection; Credit certificate; Cognitive simplification

JEL Classification: G10, G20, G21, G23, G40

Suggested Citation

Hu, Maggie and Li, Xiaoyang and Shi, Yang, Adverse Selection in Credit Certificates: Evidence from a Peer-to-Peer Lending Platform (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3315146 or http://dx.doi.org/10.2139/ssrn.3315146

Maggie Hu (Contact Author)

The Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/maggiehuresearch/research

Xiaoyang Li

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Yang Shi

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong
53167723 (Phone)

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