The crowding-out effect of formal finance on the P2P lending market: An explanation for the failure of China's P2P lending industry

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Using the credit records of the borrowers from a peer-to-peer (P2P) lending platform in China, this paper finds that P2P borrowers from cities with broader coverage of formal finance are more likely to default. Moreover, as formal finance develops, high-quality borrowers become less likely to turn to P2P lending, which suggests that formal finance exerts a crowding-out effect on the P2P lending market. This paper provides an explanation for the failure of China's P2P lending industry, implying that Fintech intended to promote financial coverage, if not reducing information asymmetry, does not necessarily lead to desirable economic and social outcomes.