Research

Publication

"Gaining a Seat at the Table: Enhancing the Attractiveness of Online Lending for Institutional Investors" (with Ram Gopal, Xiao Qiao, and Moris Strub), Forthcoming, Information Systems Research [DOI]

 Working Paper

"Doing Well by Doing Good: Interest Rate Determination for Unsecured Personal Loans" (with Ram Gopal, Xiao Qiao, and Moris Strub), Job Market Paper

Abstract: Perhaps the most important aspect of an unsecured personal loan is its interest rate. Interest rates that accurately reflect risk are not only important from a financial perspective but also promote financial inclusion and fairness in credit markets. In practice, interest rates often fail to accurately reflect loan risk, leading to sub-optimal credit allocation and biases of borrowers. We propose a novel method of interest rate determination based on the economic rationale that all borrowers should have fair access to credit at prices commensurate to their repayment risk. The implication of this rationale is that interest rates should provide the same risk-return trade-off across loans. We evaluate the pricing framework using loan samples from LendingClub. Compared with LendingClub's existing pricing strategy, our methodology effectively reduces the interest rate disparity between borrowers with different credit scores by 38.7% and removes the existing bias in interest rates against African American borrowers. Meanwhile, on average, loans maintain their return on investment for lenders under the new interest rates. Our results show that by setting interest rates that reflect the inherent risk of loans, online lending platforms have the potential to improve social welfare by promoting fairer lending practices – doing well by doing good.  

 Presentations

Research Seminars