Ginger Zhe Jin

Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.Com

This paper studies peer-to-peer (p2p) lending on the Internet. Prosper.com, the first p2p lending website in the US, matches individual lenders and borrowers for unsecured consumer loans. Using transaction data from June 1, 2006 to July 31, 2008, we examine what information problems exist on Prosper and whether social networks help alleviate the information problems. As we expect, data identifies three information problems on Prosper.com. First, Prosper lenders face extra adverse selection because they observe categories of credit grades rather than the actual credit scores. This selection is partially offset when Prosper posts more detailed credit information on the website. Second, many Prosper lenders have made mistakes in loan selection but they learn vigorously over time. Third, as Stiglitz and Weiss (1981) predict, a higher interest rate can imply lower rate of return because higher interest attracts lower quality borrowers. Micro-finance theories argue that social networks may identify good risks either because friends and colleagues observe the intrinsic type of borrowers ex ante or because the monitoring within social networks provides a stronger incentive to pay off loans ex post. We find evidence both for and against this argument. For example, loans with friend endorsements and friend bids have fewer missed payments and yield significantly higher rates of return than other loans. On the other hand, the estimated returns of group loans are significantly lower than those of non-group loans. That being said, the return gap between group and non-group loans is closing over time. This convergence is partially due to lender learning and partially due to Prosper eliminating group leader rewards which motivated leaders to fund lower quality loans in order to earn the rewards.

Does health insurance coverage lead to better health and educational outcomes? Evidence from rural China.

Using the 2006 China Agricultural Census (CAC), we examine whether the introduction of the New Cooperative Medical System (NCMS) has affected child mortality, maternal mortality, and school enrollment of 6-16year olds. Our data cover 5.9 million people living in eight low-income rural counties, of which four adopted the NCMS by 2006 and four did not adopt it until 2007. Raw data suggest that enrolling in the NCMS is associated with better school enrollment and lower mortality of young children and pregnant women. However, using a difference-in-difference propensity score method, we find that most of the differences are driven by endogenous introduction and take-up of the NCMS, and our method overcomes classical propensity score matchings failure to address selection bias. While the NCMS does not affect child morality and maternal mortality, it does help improve the school enrollment of six-year-olds.

Dividing online and offline: A case study

Every new method of trade offers an opportunity for economic agents to compare its costs and benefits relative to the status quo. Such comparison motivates sorting across market segments and reshapes the whole marketplace. The Internet provides an excellent example: it introduces substantial search cost savings over brick and mortar retail stores but imposes new obstacles for sellers to convey quality. Using sports card trading as a case study, we provide empirical evidence on (1) the sorting of product quality between the online and offline segments, (2) the changes for retail outlets after the Internet came into place, and (3) how supporting industries such as professional grading and card manufacturing adapted to take advantage of the new market. Copyright 2007, Wiley-Blackwell.

Gaming in Air Pollution Data? Lessons from China

Abstract Protecting the environment during economic growth is a challenge facing every country. This paper focuses on two regulatory measures that China has adopted to incentivize air quality improvement: publishing a daily air pollution index (API) for major cities since 2000 and linking the API to performance evaluations of local governments. In particular, China defines a day with an API at or below 100 as a blue sky day. Starting in 2003, a city with at least 80% blue sky days in a calendar year (among other criteria) qualified for the “national environmental protection model city” award. This cutoff was increased to 85% in 2007.Using officially reported API data from 37 large cities during 2000-2009, we find a significant discontinuity at the threshold of 100 and this discontinuity is of a greater magnitude after 2003. Moreover, we find that the model cities were less likely to report API right above 100 when they were close to the targeted blue sky days in the fourth quarter of the year when or before they won the model city award. That being said, we also find significant correlation of API with two alternative measures of air pollution – namely visibility as reported by the China Meteorological Administration (CMA) and Aerosol Optical Depth (AOD), corrected for meteorological conditions, from NASA satellites. The discontinuity around 100 suggests that count of blue sky days could have been subject to data manipulation; nevertheless, API does contain useful information about air pollution.

Does price reveal poor-quality drugs? Evidence from 17 countries

Focusing on 8 drug types on the WHO-approved medicine list, we constructed an original dataset of 899 drug samples from 17 low- and median-income countries and tested them for visual appearance, disintegration, and analyzed their ingredients by chromatography and spectrometry. Fifteen percent of the samples fail at least one test and can be considered substandard. After controlling for local factors, we find that failing drugs are priced 13.6-18.7% lower than non-failing drugs but the signaling effect of price is far from complete, especially for non-innovator brands. The look of the pharmacy, as assessed by our covert shoppers, is weakly correlated with the results of quality tests. These findings suggest that consumers are likely to suspect low quality from market price, non-innovator brand and the look of the pharmacy, but none of these signals can perfectly identify substandard and counterfeit drugs.

Games Parents and Adolescents Play: Risky Behaviors, Parental Reputation, and Strategic Transfers

This paper examines parental reputation formation in intra-familial interactions. In a repeated two-stage game, children decide whether to drop out of high school or daughters decide whether to have births as teens and parents then decide whether to provide support to their children beyond age 18. Drawing on Milgrom and Roberts (1982) and Kreps and Wilson (1982), we show that, under certain conditions, parents have the incentive to penalize older children for their adolescent risk-taking behaviours in order to dissuade their younger children from such behaviours when reaching adolescence. We find evidence in favour of this parental reputation model.

Blind Trust Online: Experimental Evidence from Baseball Cards

Before reaping transaction cost savings from the Internet, online sellers must credibly communicate the quality of their goods or their reliability of delivery. We use baseball cards as an example to address (1) whether consumers fully understand the risk of online trading, (2) the extent to which consumers employ seller reputation and professional grading to alleviate the risk they are exposed to, and (3) the impact of online trading on the retail market and supporting industries. An experiment is carried out to obtain actual baseball cards from both online and retail markets whose quality is then professionally graded and compared to the prices paid by online buyers for goods with similar claims. Our findings indicate that some uninformed online buyers are misled by non-credible claims of quality; they pay higher prices but do not receive better quality and in fact are defrauded more often. Although a combination of professional grading and reputation mechanisms appear to have the potential to solve the problem, they have only had limited success so far. Data on structural changes in the baseball card industry suggest the problems stemming from buyer misconception may have far-reaching consequences, extending beyond the immediate losses of defrauded consumers to influencing producer and supply decisions. Our findings also suggest that empirical studies using online price data should be careful of what assumptions they are making of online users and what behaviors of buyers and sellers are likely to drive the price data.

Optimal Aggregation of Consumer Ratings: An Application to Yelp.com

Consumer review websites leverage the wisdom of the crowd, with each product being reviewed many times (some with more than 1,000 reviews). Because of this, the way in which information is aggregated is a central decision faced by consumer review websites. Given a set of reviews, what is the optimal way to construct an average rating? We

The Power of Information: How Do U.S. News Rankings Affect the Financial Resources of Public Colleges?

In 1990, the U.S. News & World Report (USNWR) extended the coverage of its college rankings from only the top 25 to all national universities and colleges. This paper utilizes this exogenous information shock to identify the impact of college quality information on the financial resources of public colleges. Using college level data from 1987 to 1995, we have three main findings: first, USNWR coverage causes colleges to increase educational and general expenditures per student. Second, these expenditure responses are funded by a 6.5% increase in state appropriations per student, but tuition revenue does not respond. Third, the state appropriation response to USNWR exposure is larger the larger the pre-college age population, voter turnout and USNWR newsstand sales are in a state. These heterogeneous responses are consistent with the USNWR rankings reducing the scope for political agency. Thus our results suggest that, in addition to a consumer response, the publication of quality rankings may influence the provision of quality through a political channel.

Is No News (Perceived as) Bad News? An Experimental Investigation of Information Disclosure

This paper uses laboratory experiments to directly test a central prediction of disclosure theory: that market forces can lead businesses to voluntarily provide information about the quality of their products. This theoretical prediction is based on unraveling arguments, which require that consumers hold correct beliefs about non-disclosed information. Instead, we find that receivers are insufficiently skeptical about nondisclosed information, and as a consequence, senders do not always disclose their private information. However, when subjects are informed about non-disclosed information after each round, behavior slowly converges to full unraveling. This convergence appears to be driven by an asymmetric response in receiver actions after learning that they were profitably deceived. Despite the change in receiver behavior, stated beliefs about sender strategies remain insufficiently skeptical, which suggests that while direct and immediate feedback induces equilibrium behavior, it does not reduce strategic naivete.