Platform Competition in Peer-to-Peer Lending Considering Risk Control Ability

Abstract

As a new e-commerce phenomenon in financing, peer to peer (P2P) lending has received increased attention recently. For P2P lending platforms, risk control ability (i.e., the ability to accurately assess and screen borrowers to control the credit risk of loans) is a competitive differentiator. The paper models a three-stage game to investigate optimal risk control ability and corresponding optimal prices of P2P lending platforms under different tariffs and agents’ homing choices. Risk-price coefficients for lenders and borrowers are introduced to measure the impact of risk control ability on prices, where higher risk-price coefficients indicate that prices are more sensitive to risk control ability. Moreover, the paper investigates the role of platforms’ scales in deciding optimal risk control ability, prices and market shares. To our best knowledge, this is the first theoretical paper to study the competition in P2P lending considering risk control ability based on game theory. The analytical results show that: 1) In equilibrium, optimal risk control ability decreases in risk-price coefficients; 2) The risk-price coefficient for lenders contributes less than that for borrowers to optimal risk control ability if some lenders multi-home; 3) Smaller platforms have higher risk control ability, prices and attract more borrowers than larger platforms under specific conditions.