Herding in a P2P lending market: Rational inference OR irrational trust?

Herding exists in stock markets worldwide. However, little research has tested whether lenders in P2P lending markets herd. This study uses data for 4,856,413 bids placed on 120,207 loan requests in Renrendai from the website's inception in October 2010 through January 2015 to examine the dynamic relationship between prior cumulative bids and current bids. We find that lenders appear to imitate each other's behavior and herd in the P2P lending market funding percentage and time-limit effects are controlled for. We also examine the classification of herding in the P2P lending market by dividing the bids into manual and automated bids. We find evidence for the existence of both rational and irrational herding in the P2P lending market.