Moral hazard in online peer-to-peer lending

Does the shift towards reintermediation in the peer-to-peer (P2P) lending industry increase the market's vulnerability to moral hazard by the platform? To address this question, we develop a model where the crowdfunding platform screens loan applications and assigns interest rates to listed loans for investors to fund. We find that when the platform's only source of income is origination fees, the platform has the incentive to relax its screening effort. Relaxing the screening effort allows low-quality borrowers to list their loans on the platform, which is detrimental to lenders and sub-optimal from an aggregate welfare perspective. Our results imply that current regulations governing P2P lending platforms may not be sufficient to protect lenders from this moral hazard risk. We show that the platform's moral hazard problem can be overcome when it has sufficient skin in the game.