Auctions for social lending: A theoretical analysis

Ning Chen, Arpita Ghosh and Nicolas Lambert

Games and Economic Behavior, 2014, vol. 86, issue C, 367-391

Abstract: Prosper, today the second largest social lending marketplace with nearly 1.5 million members and $380 million in funded loans, employed an auction mechanism amongst lenders to finance each borrower's loan until 2010. Given that a basic premise of social lending is cheap loans for borrowers, how does the Prosper auction do in terms of the borrower's payment, when lenders are strategic agents with private true interest rates? We first analyze the Prosper auction as a game of complete information and fully characterize its Nash equilibria, and show that the uniform-price Prosper mechanism, while simple, can lead to much larger payments for the borrower than the VCG mechanism. We next compare the Prosper mechanism against the borrower-optimal auction in an incomplete information setting, and conclude by examining the Prosper mechanism when modeled as a dynamic auction, and provide tight bounds on the price for a general class of bidding strategies.

Keywords: Social lending; Peer-to-peer lending; Auctions; Mechanism design (search for similar items in EconPapers)
JEL-codes: D44 D82 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Auctions for Social Lending: A Theoretical Analysis (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:86:y:2014:i:c:p:367-391

DOI: 10.1016/j.geb.2013.05.004

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