Determinants and Consequences of Herding in P2P Lending Markets

In this paper, we are interested in the factors that influence herding behavior in P2P lending marketplaces. We are using data from Prosper.com to examine whether internal market specific factors and external economic factors influence the amount of herding exhibited in the market. We also investigate what consequences herding has and how marketplace participants can benefit or suffer from herding behavior in the marketplace. Based on previous models of herding in P2P lending, we calculate a herding measure over time. This herding measure is the basis for our analyses. Our preliminary analyses show support that internal factors measuring uncertainty, lenders experience, and search costs in the market influence herding. We receive inconclusive results for external factors measuring uncertainty, volatility, and bullishness in the marketplace’s economic environment. Herding has several implications for borrowers and lenders including potentially lower interest rates for borrowers but fewer completed listings.