Information asymmetries and identification bias in P2P social microlending

ABSTRACT

The Internet has created new opportunities for peer-to-peer (P2P) social lending platforms, which have the potential to transform the way microfinance institutions raise and allocate funds used for poverty reduction. Depending upon where decision-making rights are allocated, there is the potential for identification bias whereby lenders may be motivated to give to specific projects with which they have an affinity without regard to whether it represents a sound financial investment. Using data collected from Kiva, we present empirical evidence that distant upstream lenders do not have adequate information about local business and loan conditions to make sound microfinance funding decisions, but instead make decisions based on identification biases. Furthermore, more information provided on the P2P lending site about the prospective loan does not improve the lender’s information about the loan conditions, but rather exacerbates the identification bias effect.

KEYWORDS:

• Microfinance
• Kiva
• development
• identification bias
• information asymmetries
• P2P social microlending

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Frederick J. Riggins is an associate professor of Management Information Systems at North Dakota State University. He earned his Ph.D. from Carnegie Mellon University where he was awarded the William W. Cooper Doctoral Dissertation Award in Management. He has served on the faculty at Arizona State University, Minnesota, Georgia Tech, and the University of Alberta. In a ranking of IS researcher productivity, he was ranked #9 on the list of top IS researchers for the period 2003–2007. According to Google Scholar, his research papers have over 3350 citations. Dr Riggins has published in many leading journals including Management Science, Journal of Management Information Systems, Journal of the Association for Information Systems, Communications of the ACM, Electronic Commerce Research and Applications, and The African Journal of Information Systems.

David M. Weber earned a BA from Taylor University, an MBA from Xavier University, and his PhD from Arizona State University. He spent over 10 years doing industry, education, and non-profit work in the USA, India, Thailand, and Cambodia, before returning to academia. He currently holds the position of Lecturer of Information Systems at the W. A. Franke College of Business at Northern Arizona University. Dr Weber has made presentations at a number of leading conferences and has published his research in Electronic Commerce Research and Applications and The African Journal of Information Systems.

Notes

1. It will be interesting to see how P2P social lending networks evolve as borrowers increase connectivity. For example, providing opportunities for two-way dialogue would allow lenders to provide business advice and coaching to microentrepreneurs starting new businesses. In some cases, this could increase giving and improve the chances for loan success.

2. It should be noted that in the case of Kiva, all loans posted eventually get funded.

3. Keywords included: phone, computer, video, printer, copier, internet, copy machine, digital camera, scanner, toner, audio, software, cyber, computadora, network, keyboard, web, technology, ordinateur, online, webcam, technologies, xerox, database, mp3, Skype, A/V, hdd, lcd, crt, dvr, multimedia, Linux, Unix, iPod, and Microsoft.

4. Keywords included: computer, software, programmer, database, web, blogger, IT consultant, “it %”, information technology, information systems.

5. Keywords included: farm, agri, botany, botanical, landscape, garden, horticulture, goat, cattle, chicken, dairy, soil, veterinarian, zoo.