Fintech market and regulation: Lessons from China’s peer-to-peer lending platforms

Abstract

We propose a theoretical model to investigate the competition and regulation of peer-to-peer lending platforms. We demonstrate that intense competition, combined with investor naivety, prompts some platforms to offer principal guarantee terms to investors. As these platforms deviate from their role as information intermediaries, investors become vulnerable to losses resulting from moral hazard and the risk of platform collapse. We investigate the welfare implications of adjusting entry costs, reducing platforms’ private benefits, and implementing financial education. Our model elucidates the stylized facts observed during the boom and bust of China’s peer-to-peer lending market and provides valuable policy guidance.