Lender rationality and trade-off behavior: Evidence from Lending Club and Renrendai

Abstract

Using the data from two leading online lending platforms in the US and China, Lending Club and Renrendai, respectively, we compare the behaviors of risk aversion and risk-return trade-off among US and Chinese online lending investors. We use the event of the implementation of “de-guarantee” policy as a quasi-natural experiment to evaluate the impact of the policy on the behaviors of online lending investors. The results of our study show that prior to 2018, the seemingly irrational behavior of Chinese lenders – blindly pursuing high interest rates regardless of default risk – is a rational response to the fact that the loans they invest in are guaranteed, and after the implementation of the “de-guarantee” policy, Chinese online lending investors exhibit similar risk-averse behaviors as US investors. In addition, we find that lenders on the US online platform consistently exhibit risk aversion behaviors and risk-return trade-off on the interest rate, while Chinese lenders do not demonstrate this trade-off before the implementation of the “de-guarantee” policy.