Competition and Adverse Selection in an Online Lending Market

Abstract

Using data from Lending Club and Prosper, the two largest peer-to-peer lenders in the U.S., we provide evidence of adverse selection in the online personal lending market. Borrowers who were rejected by a competitor are 2.5 times more likely to default than borrowers who were not rejected by a competitor, conditional on receiving the same contract. We also show that modeled competitors' interest rate offers are significantly related to default; these offers provide explanatory power that is not captured by the actual interest rates on the loans.