The Information Value of Online Social Networks: Lessons from Peer-to-Peer Lending

We examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. We find that borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates; however, most borrowers with social ties do not perform better ex post. This finding suggests that lenders do not fully understand the relationship between social ties and unobserved borrower quality. We also find evidence of gaming on borrower participation in social networks. Overall, our findings suggest that return-maximizing lenders should be careful in interpreting social ties within the risky pool of social borrowers.