Person-to-person lending (P2PL) on the Internet is a relatively new credit market. The success of these markets hinges on their ability to provide both borrowers and lenders the chance to improve on the opportunities available in traditional intermediated credit markets. In essence, P2PL must create a more competitive market. Empirical observations provide evidence that frictions exist in these markets, which generally move markets away from competitive outcomes. Currently, auctions are the most popular mechanism for P2PL. This paper develops and analyzes an equilibrium competing auction model of P2PL. Coordination frictions and the presence of non-creditworthy borrowers create an environment where many potentially productive transactions are not made and interest rate dispersion is observed. Additionally, if the market naturally segments into groups of similar borrowers then increased frictions in a segment may lead some portion of lenders to migrate to a different segment.
Garman, Samuel R.; Hampshire, Robert C.; and Krishnan, Ramayya, "Person-to-Person Lending: The Pursuit of (More) Competitive Credit Markets" (2008). ICIS 2008 Proceedings. 160.