Information Asymmetries and Identification Bias in P2P Social Microlending

The Internet has created new opportunities for peer-to-peer (P2P) social lending platforms which have the potential to transform the way microfinance institutions (MFIs) 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. We present empirical evidence that identification biases exist at Kiva, a P2P social lending platform, resulting in inefficient loan funding decisions. Even so, prior research indicates that this inefficiency may result in more lending toward poverty reduction than in the absence of identification bias.