A Search Theoretic Model of Person-to-Person Lending

Citation:

Person-to-Person lending (P2PL) is a new and exciting Internet application. Currently, there is limited understanding of the behavior of P2PL markets and their participants because of the uniqueness and youth of these markets. This paper makes the case that lenders’ search for listings to bid on is an integral part of lender behavior, and analyses of P2PL that do not give explicit consideration to the nature of this search may very well draw inappropriate conclusions. This paper presents empirical evidence which supports the notion that P2P lenders conduct search. It also analyzes a simple model of optimal search in P2PL markets. In the context of this model, the concept of a search premium is introduced, which is the difference between the interest rate borrowers would pay in a market with costless search and the minimum interest rate they must offer to induce search.

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