Essays on the societal implications of online lending platforms
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This dissertation includes three interrelated essays which investigate the outcomes of online lending platforms on both borrowers and investors. More specifically, the first one looks at the borrowers’ side and investigates how online lending influences bankruptcies of borrowers, the second one looks at the investors’ side and investigates how the use of algorithmic trading in online lending platforms influences investing opportunities of individual investors, and the third one looks at the whole online lending market and investigates how political ideology and political distance influence investors’ behaviors and market efficiency. Essay 1 investigates the impact of online lending on bankruptcy filings. Using a difference-in-differences approach, I find that state approval of Lending Club leads to an increase in bankruptcy filings. A complementary instrumental variable analysis using loan-level data yields similar results. I find suggestive evidence that the ease of receiving a Lending Club loan causes some borrowers to overextend themselves financially, leading to bankruptcy. I also find that “strategic” borrowing – in which borrowers who are considering bankruptcy use a Lending Club loan to restructure their debt or to engage in last-minute consumption before they file – may play a role. Essay 2 studies the effects of algorithmic trading by examining the effect of an API upgrade on Prosper.com that facilitated algorithmic trading. Using a difference-in-differences strategy, I find that individual “manual” investors were crowded out of the most quickly-funded and typically best-performing loans after the API upgrade. However, the API upgrade may have increased the size of the market, thereby allowing individual investors to continue investing in the market, albeit for somewhat lower quality loans. Essay 3 studies whether political differences – which are becoming increasingly acute among Americans – inhibit market efficiency by examining whether investors in online lending markets are less likely to lend to borrowers whose political ideology (i.e., liberal or conservative) is likely to be different from their own. I leverage state-level legalization of same-sex marriage as a natural experiment to investigate how investors in online lending markets respond to this signal of a state’s “liberalness”. Results of a difference-in-differences analysis show that: (1) investors make more bids (loan offers) to borrowers in states that legalize same-sex marriage in the days immediately after passage of the law; and (2) investors from politically similar states contribute more to this increase than do investors from politically dissimilar states. This suggests that political differences influence lending decisions in online lending markets, potentially preventing beneficial investor/borrower matches from being formed. To test the generalizability of these findings, I also use all U.S. states and measure the number of bids from investors in each state to borrowers in each state. I use a gravity model to examine how political differences across states influence bidding behaviors. Results are consistent with the difference-in-differences analysis.