Research On The Effect Of Adverse Selection In P2P Lending In China

As the result of the combination of internet technology and P2P lending, P2P lending network has a promising prospect in the application of solving financing problems for small and medium sized enterprises as well as individuals. It is also the trend of future financial services. However, despite its many merits, P2P lending network faces the problem of information asymmetry. The lender, as the bearer of information disadvantages, faces the lack of borrowers'information and possible fabrication of materials. This in turn drives the lending rate to an unnecessarily high level and increases lending risk and also decreases the possibility of successful lending due to adverse selection.This thesis firstly builds up a theoretical model aiming at the adverse selection problem in P2P lending network and tries to conduct an examination on the cause and effect of adverse selection. Then follows the test of adverse selection in network lending through the influence that interest rates have on lenders'willingness to invest. A regression analysis is made using logistic model and 1200 data of borrowing subjects gathered from ppdai.com, the earliest P2P lending platform in China. Conclusions from the analysis are as follows:interest rate, number of successful lending, and credit score are the three most influential factors that affect lenders' willingness to lend; amount of lending, gender, number of full repayment, and maturity of loan also have a significant influence on lenders'willingness to lend. Interest rate has the biggest negative parameter, indicating that the higher the interest rate, the lower the possibility of a successful loan, which matches the adverse selection theory. This result shows that adverse selection exists in P2P lending network at a certain degree and that the market for P2P lending is indeed a lemon market.This thesis provides theoretical evidences for solving the three major problems of P2P lending network and puts forward the following policy suggestions for its healthy development:firstly, related laws and regulations should be perfected to include P2P lending network into (he regulatory framework; secondly, financial management of the lending platforms should be improved; thirdly, information disclosure should be strengthened and a national credit scoring system should be built and perfected.