An Incentive Mechanism for Increasing Repayment Rate for Online Social Lending

Abstract

Social lending is, in its broadest sense, a certain breed of financial transaction (primarily lending and borrowing) that occurs directly between individuals without the intermediation or participation of a traditional financial institution. Social lending is a dynamic trading mechanism that can directly match one consumer with another consumer. Most manual transaction processes conducted by traditional financial institutions can be done automatically and tailored to each consumer in social lending so that every player can maximize his own values in the transactions. The processes that could be automated include adjusting interest rates, creating incentives for borrowers to return money, recommending lenders and borrowers, creating portfolios, etc. In this paper we focus on an incentive mechanism for borrowers because they are crucial for dynamic social lending since they could help increase worth and reduce payment delays. We propose an incentive mechanism that improves a borrower’s payment delay score. The mechanism offers incentives for payment with rewards (penalties) to borrowers. We demonstrate the efficiency on our proposed methods by conducting agent simulations.