Risk Preference of the Investors and the Risk of Peer-to-Peer Lending Platform

Peer-to-Peer (P2P) lending platform has experienced a prosperity in China from 2007 to 2016. However, in recent years, the risks and problems of the P2P platform increase rapidly. To figure out the reasons, this article establishes a theoretical model to analyze the risk of platform from the investors' side. Through the model, we find that the higher the degree of the risk aversion of the investors, the higher the level of risks of the P2P lending platform. The model also indicates that the ratio of the institutional investors over the retail investors, the intermediary fee paid for the platform, as well as the probability of being arrested for the platform are factors that can influence the risk of the P2P platform. On this basis, we provide a new perspective to understand the mechanism of the P2P platform's risks, and we suggest that to improve the clauses of qualified investors and to give adequate pricing power to the P2P platform can be helpful to reduce the risks of the platform.