Auctions for social lending: A theoretical analysis |
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| Institution: | 1. Division of Mathematical Sciences, Nanyang Technological University, Singapore;2. Department of Information Science, Cornell University, NY, USA;3. Graduate School of Business, Stanford University, 655 Knight Way, Stanford, CA 94305, USA;1. Division of Mathematical Sciences, Nanyang Technological University, Singapore;2. Department of Information Science, Cornell University, NY, USA;3. Graduate School of Business, Stanford University, 655 Knight Way, Stanford, CA 94305, USA;1. Center of Economic Research at ETH Zürich (CER-ETH), Switzerland;2. Department of Economics, Maastricht University, Netherlands;1. Department of Economics, University of Exeter, Rennes Drive, Streatham Court, Exeter, EX4 4PU, UK;2. Department of Quantitative Economics, University Maastricht, P.O. Box 616, 6200 MD Maastricht, The Netherlands;1. NYC Office of Management and Budget, 255 Greenwich Street, New York, NY 10007, USA;2. Melbourne Business School, 200 Leicester Street, Carlton, VIC 3053, Australia;3. Naveen Jindal School of Management, University of Texas at Dallas, 800 W. Campbell Rd (SM31), Richardson, TX 75080, USA |
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| Abstract: | Prosper, today the second largest social lending marketplace with nearly 1.5 million members and $380 million in funded loans, employed an auction mechanism amongst lenders to finance each borrower's loan until 2010. Given that a basic premise of social lending is cheap loans for borrowers, how does the Prosper auction do in terms of the borrower's payment, when lenders are strategic agents with private true interest rates? We first analyze the Prosper auction as a game of complete information and fully characterize its Nash equilibria, and show that the uniform-price Prosper mechanism, while simple, can lead to much larger payments for the borrower than the VCG mechanism. We next compare the Prosper mechanism against the borrower-optimal auction in an incomplete information setting, and conclude by examining the Prosper mechanism when modeled as a dynamic auction, and provide tight bounds on the price for a general class of bidding strategies. |
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| Keywords: | Social lending Peer-to-peer lending Auctions Mechanism design |
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