Person-to-person credit markets have gained popularity in recent years. Their existence as an alternative to traditional credit markets is attractive considering the recent credit crunch. Yet, our knowledge of these markets is limited. The purposes of the research program offered in this proposal are twofold: first, I will provide answer to three open questions in the regulation of financial markets and in behavioral finance. Second, by addressing these questions, an understanding of the forces shaping alternative credit markets will be gained. In order to carry out the research program, I will utilize a new rich data set from Prosper - an online person-to-person credit marketplace operated in the US. The first part of the program focuses on the effects of interest rate restrictions. I exploit a behind-the-scene change in loan origination that suddenly increased the cap faced by some borrowers, but not by others. Given the nature of the change, I use differences-in-differences analysis to explore the effects of the cap on the access to credit, the price paid by borrowers and loan repayments. The second part of the program investigates lenders’ local bias – the preference for geographic proximity. I will quantify the extent of the bias, characterize the lenders that exhibit it, and evaluate whether it is driven by advantageous information. The third part of the program will inquire into lenders’ perception of non-verified information. Portion of the information lenders observe is unverified and potentially false. I will quantify whether the importance lenders assign to non-verified information change over the time they could communicate other potentially experienced lenders through a lenders’ online forum. The results from this research will benefit policy makers who need to know how the regulation they impose affect the marketplace, and what are the sources and the extent of the allegedly behavioral phenomena of local bias and the use in non-verified information.
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