Personal Guarantee and Peer-To-Peer Lending: Evidence from China

In this study, we examine the effect of personal guarantees in China's peer-to-peer lending market. We leverage a unique context where personal guarantees are not strictly relationship based. This setting reveals a significant economic effect of personal guarantees in enabling debt financing. Loans with guarantees are more likely to be funded, experience shorter intervals between posting and funding, attract greater bidding activity, and incur lower borrowing costs. However, such loans tend to have higher delinquency rates on average. Further analysis examines two potential mechanisms for this underperformance: adverse selection and moral hazard. The evidence supports the moral hazard theory, as non-relationship-based guarantees alter borrower incentives, leading to poorer loan performance. JEL Classification Codes : D53, D82, G2