Asymmetric Information in Peer-to-Peer Lending : Empirical Evidence from China

This paper examines how asymmetric information affects peer-to-peer lending in China. We find that default rates rise significantly with interest rates. Specifically, borrowers who select interest rates above the legal maximum private lending rate of 15.4% are more likely to default. A lack of interest rate caps to prevent adverse selection is responsible for the failure of Chinese peer-to-peer lending. However, there is no strong evidence of the moral hazard effect in relation to interest rate and loan size. In addition, it can be seen that credit scoring can mitigate the asymmetric information problem, but not eradicate it completely