How Wise Are Crowd?

A Comparative Study of Crowd and Institutions in Peer-to-Business Online Lending Markets

Ali Mohammadi, Kourosh Shafi

Publikation: KonferencebidragPaperForskningpeer review

Resumé

Funding small businesses used to be the exclusive domain of angel investors, venture capitalists, and banks. Crowds have only recently been recognized as an alternative source of financing. Whereas some have attributed great potential to the funding provided by crowds (?crowdfunding?), others have clearly been more skeptical. We join this debate by examining the performance of crowds to screen the creditworthiness of small and medium sized enterprises (SMEs) compared with institutions in the context of new online peer-to-business lending markets. We exploit the randomized assignment of originated loans to institutions and crowds in the online peer-to-business platform of FundingCircle, and find that crowds underperform institutions in screening SMEs, thereby failing to lend at interest rates that adjust for the likelihood of defaulting on a loan. The interest rates set by crowds predict default 39% less accurately than institutions. Moreover, the underperformance gap of crowds compared with institutions widens with risky and small loans, suggesting that crowds lack the expertise to assess the risks or the incentive to expend resources to perform due diligence. Overall, our findings highlight when crowds face limitations in screening SMEs.
OriginalsprogEngelsk
Publikationsdato2019
Antal sider36
StatusUdgivet - 2019
BegivenhedDRUID19 Conference - Copenhagen Business School, Frederiksberg, Danmark
Varighed: 19 jun. 201921 jun. 2019
Konferencens nummer: 41
https://conference.druid.dk/Druid/?confId=59

Konference

KonferenceDRUID19 Conference
Nummer41
LokationCopenhagen Business School
LandDanmark
ByFrederiksberg
Periode19/06/201921/06/2019
Internetadresse

Citer dette

Mohammadi, A., & Shafi, K. (2019). How Wise Are Crowd? A Comparative Study of Crowd and Institutions in Peer-to-Business Online Lending Markets. Afhandling præsenteret på DRUID19 Conference, Frederiksberg, Danmark.
Mohammadi, Ali ; Shafi, Kourosh. / How Wise Are Crowd? A Comparative Study of Crowd and Institutions in Peer-to-Business Online Lending Markets. Afhandling præsenteret på DRUID19 Conference, Frederiksberg, Danmark.36 s.
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Mohammadi, A & Shafi, K 2019, 'How Wise Are Crowd? A Comparative Study of Crowd and Institutions in Peer-to-Business Online Lending Markets' Paper fremlagt ved DRUID19 Conference, Frederiksberg, Danmark, 19/06/2019 - 21/06/2019, .

How Wise Are Crowd? A Comparative Study of Crowd and Institutions in Peer-to-Business Online Lending Markets. / Mohammadi, Ali; Shafi, Kourosh.

2019. Afhandling præsenteret på DRUID19 Conference, Frederiksberg, Danmark.

Publikation: KonferencebidragPaperForskningpeer review

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AU - Mohammadi, Ali

AU - Shafi, Kourosh

PY - 2019

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AB - Funding small businesses used to be the exclusive domain of angel investors, venture capitalists, and banks. Crowds have only recently been recognized as an alternative source of financing. Whereas some have attributed great potential to the funding provided by crowds (?crowdfunding?), others have clearly been more skeptical. We join this debate by examining the performance of crowds to screen the creditworthiness of small and medium sized enterprises (SMEs) compared with institutions in the context of new online peer-to-business lending markets. We exploit the randomized assignment of originated loans to institutions and crowds in the online peer-to-business platform of FundingCircle, and find that crowds underperform institutions in screening SMEs, thereby failing to lend at interest rates that adjust for the likelihood of defaulting on a loan. The interest rates set by crowds predict default 39% less accurately than institutions. Moreover, the underperformance gap of crowds compared with institutions widens with risky and small loans, suggesting that crowds lack the expertise to assess the risks or the incentive to expend resources to perform due diligence. Overall, our findings highlight when crowds face limitations in screening SMEs.

M3 - Paper

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Mohammadi A, Shafi K. How Wise Are Crowd? A Comparative Study of Crowd and Institutions in Peer-to-Business Online Lending Markets. 2019. Afhandling præsenteret på DRUID19 Conference, Frederiksberg, Danmark.