What Drives the Expansion of the Peer-to-Peer Lending?

We use data from the two leading P2P lending platforms on the US consumer credit market, Prosper and Lending Club, to explore the main drivers of the expansion of consumer demand for P2P credit. We exploit the heterogeneity in local credit markets at the county level to test three hypotheses: 1) global financial crisis; 2) competition and barriers to entry; and 3) learning costs. Disentangling between these hypotheses is difficult because the financial crisis has triggered an increase in market concentration and the closure of bank branches. Our findings suggest that P2P lending platforms have partly substituted for banks in counties that were more affected by banks’ deleveraging in the wake of the financial crisis. High market concentration and high branch density appear to deter the entry and expansion of the P2P lending. Finally, we find a positive impact of variables that are correlated with lower learning costs, such as education, population density, high share of young population, as well as important spatial interactions