Effectiveness of Reputation in Contracting for Customized Production: Evidence from Online Labor Markets

Abstract

This study examines the effects of reputation in the nascent but rapidly growing online labor markets. In these markets contract winners (vendors) provide clients with customized products such as computer software, business plans and artistic designs. The products are used primarily for business purposes and require time for production after project-specific contracts are awarded. These characteristics render it unclear whether online reputation will have similar effects as in online retailing, where finished and standardized products are sold for consumption. We analyze field transaction data from a major online labor market. The analyses using matched contract samples and vendor panels consistently show that, despite the governing power provided by contracts as well as the litigation and arbitration options, vendors’ online reputation can still be influential on clients. Vendors who have no reputation ratings are less likely to be chosen, and those with higher ratings are more likely to win subsequent bids. Importantly, however, such influences depend on the contract form that is used for a particular transaction — they are significant in output-based contracts but non-significant in input-based contacts. Besides extending the research on online reputation to the markets of customized production, this study shows contract form as an important boundary condition for the effectiveness of reputational information. It also provides direct managerial implications for electronic commerce in general and online labor markets in particular.