AUCTION vs. POSTED PRICE: AN EMPIRICAL INVESTIGATION OF MARKET MECHANISMS IN ONLINE PEER-TO-PEER LENDING

Abstract

The focus of this work surrounds the market mechanisms through which crowdfunding sites match supply and demand to determine the correct price for any given transaction. Using publicly available loan level data from the first U.S. online peer-to-peer lending platform, Prosper Marketplace, this work examines the effects a change in market mechanisms on pricing and transaction outcomes. Prior to December 20th, 2010, the interest rates for all loans originated over the Prosper platform were determined through an auction pricing system. However, on December 20th, 2010, Prosper unexpectedly abandoned the auction pricing system and replaced it with a posted price mechanism. Under the posted price mechanism, interest rates were set by the platform itself, and held constant throughout the listing. Specifically, this paper tests to see if there is any marked difference in contract interest rates, the likelihood of default, and returns for loans issued under the two mechanisms. Finally, I investigate how effectively Prosper has been pricing risk since the change. I find that for loans originated under the posted price mechanism, both contract interest rates and the probability of default are higher than for those originated during the auction period. Further, I find that lenders’ return on investment is lower under the posted price mechanism.