Financial Intermediary Competition, Information Acquisition and Moral Hazard: Evidence from Peer-to-peer Lending Platforms

I use unique datasets from peer-to-peer lending platforms and a platform entry event to study competition among financial intermediaries. Under competition, the risk-adjusted interest rate decreases for safe borrowers but increases for risky borrowers, and the incumbent platform becomes less prudent in borrower screening, and the corresponding loan performance is aggravated. Competition distorts the intermediaries’ incentive between borrowers and lenders through two channels. Competition reduces intermediaries’ incentive to acquire information on borrowers, allowing more lemon problems. In addition, with higher interest rates on the risky borrowers, the incumbent takes less position with her own capitals, and thus becomes less prudent in borrowers’ screening. I estimate the welfare change to this market induced by intermediary competition.