The Bilateral Effects of Platform-Sponsored Collateral in Peer-To-Peer (P2P) Lending: Evidence from China

Abstract

Using a unique large dataset collected from one of the oldest and largest P2P lending platforms in China, namely PPDAI, this article tests the bilateral effects of a special type of platform-sponsored collateral on lenders and borrowers. Both theoretically and empirically, we find that smart lenders disaggregate the surety and riskiness-signaling effects of such collateral. Our evidence indicates that lenders in China’s P2P market are smart: they anticipate that platform-collateralized loans are riskier than the non-collateralized ones in the second or higher rounds of fundraising. For the borrowers, platform-sponsored collateral increases the overall borrowing capacity owing to its surety effect. Therefore, combining the two aspects, platform-sponsored collateral increases the overall efficiency of the P2P lending market given the safety of the platform per se.