Social Heterogeneity and Local Bias in Peer-to-Peer Lending---Evidence from China

45 Pages Posted: 8 Feb 2019 Last revised: 13 Jun 2019

See all articles by Jiajun Jiang

Jiajun Jiang

Fudan University - School of Economics

Yu-Jane Liu

Peking University - Guanghua School of Management

Ruichang Lu

Department of Finance, Guanghua School of Management, Peking University

Date Written: June 4, 2019

Abstract

This paper investigates the presence of local bias in the peer-to-peer (P2P) lending market and explores the social heterogeneous factors that may affect the formulation of the investor’s local bias. We find that local biases are commonly present among investors. Investors have a 9.3% higher probability and put 105% more money in lending to local borrowers. We also find that overinvesting in local loans is correlated with a higher default risk, lower recovery rate, and lower realized return, suggesting the underperformance of these locally biased investors. By taking advantage of the diverse local culture and institutional features in China, we further show that social heterogeneity, including geography, language, and social trust, affects the degree of local biases in the P2P lending market. We propose two debiasing techniques from the P2P platforms’ perspective.

Keywords: Peer-to-Peer Lending, Local Bias, Segmentation, Asymmetric Information, Social Trust

JEL Classification: G11, G18, G29, G41

Suggested Citation

Jiang, Jiajun and Liu, Yu-Jane and Lu, Ruichang, Social Heterogeneity and Local Bias in Peer-to-Peer Lending---Evidence from China (June 4, 2019). Available at SSRN: https://ssrn.com/abstract=3322143 or http://dx.doi.org/10.2139/ssrn.3322143

Jiajun Jiang

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Yu-Jane Liu

Peking University - Guanghua School of Management ( email )

Beijing
China

Ruichang Lu (Contact Author)

Department of Finance, Guanghua School of Management, Peking University ( email )

Beijing
China

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