Signaling in Online Credit Markets∗
نویسندگان
چکیده
Recently, a growing empirical literature in industrial organization studies the effect of adverse selection on market outcomes and welfare. In this paper, we ask the natural next question, how signaling affects equilibrium outcomes and welfare in markets with adverse selection. Using data from Prosper.com, an online credit market, we estimate a model of borrowers and lenders where low reserve interest rates can signal low default risk. We compare a market with and without signaling relative to the baseline case with no asymmetric information. We find that adverse selection destroys 16% of total surplus, up to 95% of which can be restored with signaling. We also find the credit supply curves to be backward-bending for some markets, consistent with the prediction of Stiglitz and Weiss (1981). JEL Code: D82, D83, G21, L15
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