Financial Contagion in Internet Lending Platforms : Who Pays the Price?

In contrast to traditional investment markets, in P2P lending platforms it is more difficult for individuals to assess the risk of the available investment opportunities. Because of this difference, it is unknown in the literature how the news of fraud on a platform affects other legitimate platforms. By using data from a natural experiment, the 2015 Ezubao scandal in China, we show that as a consequence of negative news about a platform, all players operating in a different platform (borrowers, lenders, and the platform itself) are worse-off due to the contagion. Moreover, we present evidence that high-income individuals and those that contracted loans with investment purposes are disproportionally affected by contagion from negative news