Ripple effects of borrower's default decisions on P2P markets

Default is the most critical concern in any financial market. We study the ripple effects of borrower's default behavior in online peer-to-peer lending with a longitudinal and comprehensive dataset consisting of 347,752 loan listings. Previous studies researched several variables that determine the default risk. We examine how both online and offline friendship networks affect borrower's default behaviors. We found the borrowers are significantly impacted by the default behaviors of their social networks. The borrowers who have defaulter friends are twice likely to default than the borrowers who do not have. Nevertheless, not all friend types have equal influences. The impact is stronger for online friends while much weaker for offline friends. We further explain that default records could harm a person's social image and cause social stigma costs. This study is one of the first to investigate the default decision-making in online financial market. It has significant theoretical and practical contributions to grasp the borrower's default behaviors and further diminish default risk to stabilize the financial market.