Peer Effect on Consumer Default Decision: Evidence From Online Lending Platform

Abstract

The existence of peer effect on financial decision is well documented in the literature. However, little is known about the peer effect on default choice of consumer credit. We fill this gap by using a novel data and research design constructed from a cash loan platform in China. We find the default decision of the peers who defaulted before the default of the borrower can predict the default choice of borrower. The likelihood of default of the borrower increases by approximately 16% as one more “Before” peers who has defaulted. However, the number of “After” peers is not significantly correlated with the default choice of borrower. The results provide evidence on the casual effect of peers default decision on borrower’s default decision and mitigate the effect from the similarity effect shared between borrowers and their peers.

Keywords: Peer effect, Default Decision, Cash loan, Fintech

JEL Classification: D14, G21, Z13