The Relationship Between Information Asymmetry,'signals' And Borrowers' Default Rate

The object of this paper is P2P online loan market,which is the market where individuals provide small loans to other individual borrowers through Internet finance.P2P online loan market is a highly decentralized market,and there is no face-to-face contact between potential borrowers and lenders.Therefore,compared with ordinary loans,P2P loan investors know less about the borrower's situation,which deepens the problem of information asymmetry.The core issue of this paper is whether the information asymmetry will affect the default rate.According to the definition of information asymmetry,different economic entities have different quantity and quality of information.In P2P market,both the quality and quantity of information owned by investors are not as good as that owned by borrowers.Investors are in a disadvantageous position in the market.Investors rely heavily on the information provided by P2P platform to screen borrowers.The information provided by P2P platform to investors is the 'signal'.The reason why the‘signal'is introduced in this paper is that the degree of information asymmetry is difficult to measure.The higher the quality of the 'signal',the lower the degree of information asymmetry.It is in accordance with the definition of information asymmetry to measure the signal quality.If a piece of disclosed borrower's information is highly related to its default rate,then this information is a good 'signal',because investors can better screen borrowers,so that "bad currency expels good currency" is less likely.The above is the theory of this paper.In addition to theoretical research,this paper also raises empirical problems and makes empirical analysis.The first question of this paper is whether information asymmetry affects default rate?In this paper,two opposite events are introduced to solve this problem,one of which will enhance information asymmetry,the other will alleviate information asymmetry.The conclusion is that when the information asymmetry increases,the default rate of the borrower increases.On the contrary,when the information asymmetry weakens,the default rate of the borrower decreases.The reason why the two events have the opposite effect on the degree of information asymmetry is that after the two events,the quality of the 'signal' received by the lender is different.The event that makes the lender get a good 'signal' can alleviate the information asymmetry,and then reduce the default rate;when the event makes the quality of the'signal' provided to the lender worse,the information asymmetry is strengthened,and the default rate also rises.One of the reasons why the paper chooses LendingClub is that the paper hopes that the special income verification mechanism of LendingClub can provide reference for alleviating the information asymmetry of P2P platform in China.LendingClub has a special signal-income verification.Borrowers selected for income verification can't get the loan when they fails to pass the income verification.The second question of this paper is whether income verification can improve the quality of 'signal' and reduce the default rate?Surprisingly,income verification increases the default rate.This paper attempts to explain the conclusion in two ways.Firstly,this paper considers the heterogeneity,that is,the impact of income verification on different credit borrowers.The conclusion shows that only the borrowers with high credit rating(A or B)have lower default rate after income verification.Secondly,this paper considers the reverse causality.That is,because some borrowers are likely to default,they will accept the income verification.In order to solve the problem of reverse causality,this paper introduces the income verification reform of LendingClub again,and this paper does not only study the role of income verification.Because the income verificaiton reform has nothing to do with other variables and is exogenous.It is impossible to have a reverse causal problem.The third question of this paper is whether the income verification reform can provide a better‘signal'for verified borrowers by income,and then reduce the default rate of income verifiers?The results show that the difference of default ratebetween the borrowers who experienced income verificaiton and other borrowers is significantly reduced after the income verificaiton reform.It shows that the income verificaiton reform reduces the information asymmetry and enhances the screening ability of LendingClub.The first chapter is the introduction.Firstly,it introduces the development of Internet Finance and P2P lending in the world.Then it introduces the research content and methods.The research significance is closely combined with the innovation of this paper.Finally,the literature review is divided into domestic and foreign aspects,and the two aspects are both divided into three anglesChapter 2 of this paper introduces the development of P2P online lending,including the domestic development situation,problem platform situation,regional development situation,domestic and foreign P2P development mode,and LendingClub enterprise profile.The purpose of this chapter is to describe the general situation and problems of the research object,and to show the research value.Chapter 3 introduces the application of information asymmetry theory in the field of lending.There are two important forms of information asymmetry,one is adverse selection,the other is moral hazard.The significance of this part is to explain why the degree of information asymmetry can affect the default rate from a theoretical point of view,which shows the significance of this study and why high-quality "signals"can reduce the information asymmetry in theoryIn Chapter 4 and Chapter 5,the model construction and empirical analysis are carried out.First,according to the problems mentioned in the abstract and the literature review above,three hypotheses are put forward and specific models are constructed.Then,the introduction of variables and descriptive statistics are introduced.Chapter 5 constructs the Logit model and uses Probit model to test the robustness.The sixth chapter is the conclusion and suggestion.This paper mainly puts forward suggestions to alleviate the information asymmetry in P2P platform.The purpose is to reduce the default rate through more effective "signals".