•We study the role of social networks in peer-to-peer lending on the Internet.•Borrowers with social ties are more likely to get funded and with lower interest rates.•Most borrowers with social ties do not perform better ex post.•Lenders may not fully understand the relationship between social ties and borrower quality.•We find evidence of gaming on borrower participation in social networks. We examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. We find that borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates; however, most borrowers with social ties are more likely to pay late or default. We provide evidence that these findings are driven by lenders not fully understanding the relationship between social ties and unobserved borrower quality. Overall, our findings suggest caution for using online social networks as a signal of quality in anonymous transactions.