Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending

Abstract

How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows that regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from regions with higher social capital receive larger bids from individual lenders and have higher funding success, larger loan sizes, and lower default rates, especially for low-quality borrowers. Lenders from regions with higher social capital take higher risks and have higher default rates, especially for inexperienced lenders. Cross-regional transactions are most (least) likely to be realized between parties from regions with high (low) social capital.

Migrants and default: Evidence from China

“…A growing body of literature has investigated the predictable factors of creditworthiness and financing costs in the peer-to-peer lending market. For instance, race (Pope & Sydnor, 2011), gender (Chen et al, 2017;Chen et al, 2020;Li et al, 2020), education (Chen et al, 2018a;Xu et al, 2020), formal credit records (Li et al, 2021), credit grade (Emekter et al, 2015), appearance (Duarte et al, 2012), social capital (Freedman & Jin, 2017;Hasan et al, 2020Hasan et al, , 2021Jiang et al, 2020;Lin et al, 2013), university reputation (Li & Hu, 2019), and loan description (Chen et al, 2018b;Dorfleitner et al, 2016;Herzenstein et al, 2011) can predict borrowers' repayment behavior or interest rates.…”

“…Additionally, migrants are more monetarily motivated and are more likely to have sufficient savings (Barham & Boucher, 1998;Knight et al, 2011) than are nonmigrants. Moreover, borrowers from regions with higher social capital have lower default rates (Hasan et al, 2020(Hasan et al, , 2021. The trust index from a national survey of Chinese enterprises in 2000 (Zhang & Ke, 2003) is a component of social capital (Hasan et al, 2020(Hasan et al, , 2021.…”

“…Moreover, borrowers from regions with higher social capital have lower default rates (Hasan et al, 2020(Hasan et al, , 2021. The trust index from a national survey of Chinese enterprises in 2000 (Zhang & Ke, 2003) is a component of social capital (Hasan et al, 2020(Hasan et al, , 2021. If migrants incorporate themselves into a trusted culture, then they have lower default rates.…”

“…We collect loan-level data from Renrendai, one of the leading online lending platforms in China. 2 A strand of literature has also used Renrendai as an essential data source to study the issues of the Chinese peer-to-peer lending market (Chen et al, 2018b(Chen et al, , 2020Hasan et al, 2021;Jiang et al, 2020;Li et al, 2020Li et al, , 2021Liao et al, 2021;Wang et al, 2021;Xu et al, 2020). Borrowers should add their interest rate, maturity, amount, age, gender, educational qualification, income, and work address to Renrendai.…”

“…We construct the wage gap and saving gap between the working location and native place based on the disposable income per capita and consumption expenditure per capita in the prefecture‐level city from the CEIC. The original trust index from a national survey of Chinese enterprises in 2000 (Zhang & Ke, 2003) can measure trustworthy culture in the peer‐to‐peer lending market (Hasan et al, 2021; Jiang et al, 2020). We obtain the trust index and construct the culture gap on the basis of the difference between the working location and the hometown.…”