The Winner’s Curse in an Online Lending Market∗

Using data from Lending Club and Prosper, the two largest peer-to-peer lenders in the U.S., we provide evidence of the winner’s curse in the online personal lending market. Borrowers who were rejected by a competitor are twice as likely to default as borrowers who were not rejected, conditional on receiving the same contract. Borrowers are also more likely to default when offered higher interest rates or smaller loan amounts by a competitor. Surprisingly, the loan amount effect is larger than the interest rate effect, and loan amount is a more closely related to lender choice. For helpful comments and suggestions, I thank Kevin Roshak, Nisan Langberg, Paul Povel, Kris Jacobs, Praveen Kumar, Itzhak Ben-David, Tetyana Balyuk, and Rauli Susmel. University of Houston, C.T. Bauer College of Business; Houston, TX 77204-6021; phone: 713-306-3700; email: [email protected]