Unpacking the effects of rule of law on the marketplace lending: Evidence from China

This study investigates the relationship between the rule of law and credit outcomes in China’s marketplace lending market. Using data from Renrendai and a city-level rule of law index constructed by natural language processing techniques, we find that stronger rule of law is correlated with lower default probabilities and higher returns for lenders, indicating that robust legal environments may contribute to improved borrower discipline and reduced credit risk. However, the rule of law has a limited influence on lender behaviors, suggesting that institutional improvements primarily enhance borrower credibility rather than directly shaping lender actions. These results remain consistent across various robustness tests. Our findings highlight the critical role of rule of law in digital finance. While the marketplace lending model studied has been phased out in China, the insights offer valuable implications for global digital finance and FinTech practices.