Article | Review of Financial Studies | May 2019

Marketplace Lending: A New Banking Paradigm?

by Boris Vallée and Yao Zeng

Abstract

Marketplace lending relies on large-scale loan screening by investors, a major deviation from the traditional banking paradigm. Theoretically, participation of sophisticated investors in marketplace lending improves screening outcomes but also creates adverse selection. In maximizing loan volume, the platform trades of these two forces by choosing intermediate levels of platform pre-screening and information provision to investors. We use novel investor-level data to test these predictions. We empirically show that more sophisticated investors screen loans differently and systematically outperform less sophisticated investors. However, the outperformance shrinks when the platform reduces information provision to investors, consistent with platforms managing adverse selection.

Keywords: marketplace lending; Screening; sophisticated investors; Adverse selection; Financing and Loans; Performance; Information;

Format: Print Find at Harvard

Citation:

Vallée, Boris, and Yao Zeng. "Marketplace Lending: A New Banking Paradigm?" Review of Financial Studies 32, no. 5 (May 2019): 1939–1982.

About the Author

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Boris Vallee
Torstein Hagen Associate Professor of Business Administration
Finance

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