Risk management is the core issue to determine the sustainable and healthy development of financial innovation. Based on the information economics and game theory, an information asymmetry mathematical model is set up to analyze the acting mechanism and working conditions of social network in mitigating P2P lending's credit risk. It is proved that with the introduction of social network, the credit risk of P2P lending can be mitigated by three mechanisms of social network, which are ex ante information acquisition mechanism, joint liability mechanism and ex post default constraint mechanism. Those constitute unique credit risk mitigation mechanisms of social network, which can effectively relieve adverse selection caused by imperfection of credit system as well as moral hazard caused by lack of effective monitoring mechanism and lack of default constraint mechanism in P2P lending market. Joint liability, dynamic incentive, the strength of supervision, sanctions, constraints of default intensity and the mining of social information are thedetermining factors to the risk mitigation level of social network. The theoretical frameworks are first proposed for credit risk mitigation of social network in P2P lending, including the developed social network theory and credit risk management theory,which provide new scientific evidence and theoretical support for risk control trial with social network in P2P platform. Great theoretical importance is provided to understand and grasp risk mitigation mechanisms of social network, as well as to use social network credit risk management.
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