Adverse Selection in Credit Certificates: Evidence from a P2P Platform
Title: Adverse Selection in Credit Certificates: Evidence from a P2P Platform
Speaker：Maggie Rong HU（香港中文大学，房地产与金融系助理教授）
Host：冷铁成（中山大学岭南学院，助理教授）
Date and Time: 2019年12月20日（周五）下午14:30-16:00
Location: Wang Daohan Room, Lingnan Hall
Language: English + Chinese
Abstract:
Certificates are widely used to solve adverse selection when information is asymmetric. Peer-to-Peer (P2P) lending platforms encourage borrowers to obtain and disclose various kinds of credit certificates, which could play a pivotal role in ensuring investment efficiency. We perform the first empirical investigation of the role of certificates in P2P lending market, using unique data from Renrendai, one of China's largest P2P lending platforms. Surprisingly, we find loans with more credit certificates have worse payment performance with higher rates of delinquency and default. However, lenders remain attracted by higher certificates despite lower loan performance ex post, which results in distorted capital allocation and reduced investment inefficiency. Overall, we document a setting where credit certificates fail to solve adverse selection in credit market, as the certificates themselves are subject to adverse selection, where poor-quality borrowers use more certificates to boost their credit profiles and improve their funding success. Possible explanations for this phenomenon include differential marginal benefit of certificates for different borrower types, cognitive simplification, and borrower myopia.
Introduction of speaker:
