Platform Perils: The winner's curse on B2C consumer lending platforms

Endre Reite () and Joakim Prestmo ()
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Endre Reite: Norwegian University of Science and Technology, NTNU Buisness School
Joakim Prestmo: NTNU, Department of Economics

Economics Bulletin, 2023, vol. 43, issue 1, 500 - 509

Abstract: This article compares the estimate of credit risk and actual defaults on unsecured loans originating from a B2C lending platform to a bank with those taken directly from the same bank. Our study expands on earlier research by comparing credit scoring and default-level differences through simulations of banks' bidding process for a loan with similar credit risk models. Banks systematically and significantly underestimate the risk of loan applications through the B2C lending platform. The bank also experiences a disproportional loss of profitable clients on platform loans. Credit risk models from direct lending should be adjusted for this bias before they are employed in platform lending. Both effects can be linked to a winner's curse consistent with both theory and simulations, which is not previously explored.

Keywords: winner's curse; peer-to-peer lending; financial transparency, consumer loans, marketplace lending (search for similar items in EconPapers)
JEL-codes: C7 G2 (search for similar items in EconPapers)
Date: 2023-03-30
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