Rational Herding in Microloan Markets

By Juanjuan Zhang, Peng Liu. Management Sciences, 2012

883 citations recorded by the source corpus.

This document presents supporting materials for the following publication: Zhang, Juanjuan and Peng Liu (2012), "Rational Herding in Microloan Markets," Management Science, Vol. 58, No. 5, May, pp. 892-912. Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel dataset which tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders. Well-funded borrower listings tend to attract more funding after we control for unobserved listing heterogeneity and payoff externalities. Moreover, instead of passively mimicking their peers (irrational herding), lenders engage in active observational learning (rational herding); they infer the creditworthiness of borrowers by observing peer lending decisions, and use publicly observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Similarly, favorable borrower characteristics (e.g., friend endorsements) weaken the herding effect, as lenders attribute herding to these observable merits. Follow-up analysis shows that rational herding beats irrational herding in predicting loan performance.

Subfields: Economics and Econometrics, Finance, Management Information Systems

View Paper: https://www.semanticscholar.org/paper/091332feb2b7685c9af17f95978e672444460006

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Citations in the corpus

Equity crowdfunding: A new phenomena (2016, background): “…to collect and analyse data from sites such as Kickstarter and Indigogo (see Agrawal et al (2011, 2014), Belleflamme et al (2014), Mollick (2014), Zhang and Liu (2012) to name a few), and because as discussed above, regulation in the U.S. for equity based crowdfunding has, until very recently,…”
Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts (2016, neutral): “Indeed, early studies have found herding in peer-to-peer lending, a form of crowdfunding, with conflicting evidence over the degree to which herding represents positive information cascades or mere imitation (D. Chen & Lin, 2014; Kuppuswamy & Bayus, 2013; Zhang & Liu, 2012).”
Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions (2015, neutral): “The observed acceleration of investment as an artist gets closer to $50,000 is consistent with Zhang and Liu (2012), who document a similar pattern in the context of lending on Prosper.”
Exploring entrepreneurial legitimacy in reward-based crowdfunding (2014, background): “…a given project may be drivers of project legitimacy – supporting some projects just enough but others not at all (Burtch, Ghose, and Wattal 2011; Zhang and Liu 2012) Resource assembly through traditional venture capital tends to be geographically contingent (Rocha 2004; Harrison, Mason, and…”
Crowdfunding: Motives, Definitions, Typology and Ethical Challenges (2016, neutral): “In addition, crowdfunding platforms like Kiva.org and Prosper.com are facilitating new ways of microﬁnancing in the area of peer-to-peer lending (Zhang and Liu 2012).”
Individual crowdfunding practices (2013, background): “Relatedly, there are several papers on the peer-to-peer lending platform Prosper (see, e.g., Hildebrand, Puri, and Rocholl 2011; Lin, Prabhala, and Viswanathan 2012; Zhang and Liu 2012).”
Internal Social Capital and the Attraction of Early Contributions in Crowdfunding (2015, background): “Observational learning has been found to occur in online auctions (Simonsohn & Ariely, 2008), electronic microloan markets (Zhang & Liu, 2012), online purchase of software programs (Duan et al., 2009), and music (Salganik, Dodds, & Watts, 2006).”