“The Role of Trust in Online Lending” with Isaiah Hull (Sveriges Riksbank), Yingjie Qi (Stockholm School of Economics) and Xin Zhang (Sveriges Riksbank)
We study the impact of trust on the expansion of online lending in the U.S. over the 2008-2016 period. Using data from the largest platform, we demonstrate that a misconduct-driven decline of trust in traditional banking is associated with a statistically and economically significant increase in online lending at the state level. To the contrary, increased social trust strengthens in-person, bank-based borrowing and informal borrowing, reducing the demand for impersonal online lending. Both of these effects operate primarily through borrowers. We also use a shock that affects only investors to demonstrate that distrust in traditional finance increases participation in online lending.
- Keywords: financial development, consumer loans, bank misconduct, FinTech.