Effects Of Borrower’s Social Capital On Default Risk On The P2P Online Lending

P2P (Peer-to-Peer)network lending refers to small unsecured loans betweenindividuals, directly through the Internet platform to establish lending relationshipand complete the related formalities, finally achieve "financial disintermediation".Due to information asymmetry, lack of mortgage guarantee, small and medium-sizedenterprises(SEMs) are vulnerable to be excluded from formal financial institutions,and P2P lending can meet the demand of the enterprise funds to a certain extent, atthe same time provide financing services for the general population. But, the questionthat the virtual network, information asymmetry, and platforms’ risk control measuresis not sound and so on, can increase the possibility of default by the borrower, leadingto a high loan default rate of the P2P lending market. So the platform must be basedon the operation mode of its own characteristics, to establish a reasonable andeffective risk control mechanism, which is the core of the P2P lending platformconstruction. Now many platforms design the risk control mechanism to increase theusers’ social capital to improve their reliability, thereby reduce the risk of default.This paper mainly launches the research from the following several aspects: first,comb through the relevant literature and theory, it can get group relation, friendshipand recommendation trust as the substitute variable of social capital. Then, it adoptthe mechanism design of incentive compatibility constraint to study the mechanism ofsocial capital in the P2P lending. According to the different substitution variable ofsocial capital, it specific analysis the restriction mechanism of social capital toborrower’s default risk. Finally, it establishes the model of "social capital variables+hard information", use binary Logistic regression method, and tests empirically theeffects of social capital on default risk respectively taking advantage of the data ofAmerica’s Prosper and Chinese PPdai platform. In conclusion, the study proposessome management implications about risk control mechanism of the online modelplatform. The results show that the existence of borrower’s social capital can reduce defaultrisk in the P2P lending. Under the attraction of refinancing opportunities as well asthe supervision and punishment of social capital, borrowers will choose the timelyrepayment, rather than the default behavior. Meanwhile, based on the regressionresults of PPdai platform, it establishes the auxiliary model to forecast borrowers’default frequency, so as to help lenders to make rational investment decisions,exclude high default risk borrowers in a timely manner.The main innovation of this paper lies in: First, it attempts to use recommend trustas the substitution variable of social capital into the study of the P2P lending, breaksthrough the limitations of social capital variables that the previous study only makeuse of group relation or friendship. Second, it adopts the mechanism design ofincentive compatibility constraint to isolate behavior choices of borrowers at the timeof loan maturity. Third, in the domestic P2P lending market, using the data of PPdaiplatform, it introduces the substitution variable of social capital into the model tostudy default risk of the borrower, finally establishes the auxiliary model to forecastborrowers’ default frequency.