Survival Scale: Marketplace Lending and Asymmetric Network Effects

Abstract

Using data on 988 peer-to-peer lending platforms in China, we examine cross-side network effects (CNEs)---arguably the most important factor for multi-sided marketplaces---throughout platforms’ lifecycle in a dynamic industry characterized by entries, exits, and network externalities. We find that unlike borrowers’ symmetric CNEs, lenders’ CNEs are lower on declining, more established, or smaller platforms than on growing, new, or larger platforms. Borrowers’ CNEs are also larger than lenders’ CNEs, especially for declining or sub-scale platforms. We rationalize the asymmetries in a model of financial platforms incorporating endogenous failures and their empirically motivated distinguishing features: lenders’ portfolio diversification, failures’ differential impacts on agents, and borrowers’ stickiness. The model further predicts that lenders’ CNEs and platforms’ ranks predict the platforms’ survival likelihood, among others, which the data corroborate. Our findings provide novel economic insights on multi-sided platforms and inform FinTech practitioners and regulators.