Balancing Attraction and Risk Revelation: The Optimal Reservation Price in Peer-to-Peer Loan Auctions

Auction theory states that setting a non-trivial reservation price will generally reduce efficiency. However, new research has shown that reservation prices can have strong signaling effects on equilibrium outcomes. Using data from online P2P loan auctions, we show that the optimal reservation price varies nonlinearly in borrower quality (credit score and debt-to-income) as it balances the tradeoff between offering higher rates of return to attract bidders against potentially signaling low quality and causing the borrower to pay higher interest rates.