Khwaja, Asim, Rajkamal Iyer, Erzo Luttmer, and Kelly Shue. 2016. “Screening Peers Softly: Inferring The Quality Of Small Borrowers”. Management Science 62 (6): 1554-1577.
This paper examines the performance of new online lending markets that rely on nonexpert individuals to screen their peers’ creditworthiness. We find that these peer lenders predict an individual’s likelihood of defaulting on a loan with 45% greater accuracy than the borrower’s exact credit score (unobserved by the lenders, who only see a credit category). Moreover, peer lenders achieve 87% of the predictive power of an econometrician who observes all standard financial information about borrowers. Screening through soft or nonstandard information is relatively more important when evaluating lower-quality borrowers. Our results highlight how aggregating over the views of peers and leveraging nonstandard information can enhance lending efficiency.