Does Monitoring Lead to a ‘Warm’ Start in Online Platforms?

Abstract

Many online labor platforms nowadays employ reputation systems and monitoring systems to mitigate moral hazard. While reputation systems have the potential to reduce moral hazard, they suffer from the cold-start problem, that is, new entrants with no reputation face a high entry barrier. Unlike reputation systems that provide information on workers’ prior performance, monitoring systems operate by providing employers with direct observation of workers’ actions. Given monitoring systems can reduce information asymmetry by tracking workers’ hours and effort levels, employers face a lower moral hazard risk with new entrants. Therefore, monitoring systems can potentially alleviate the cold-start problem. In this paper, based on a unique dataset from Freelancer.com, we empirically investigate the effect of monitoring systems on the entry barrier by looking at both employers’ hiring preferences and workers’ entry behaviors. We leverage the differential availability of the monitoring system across two project types (i.e., it is only available for time-based projects but not for fixed-price ones) to implement a difference-in-differences (DID) estimation. Based on a sample including 1,635 fixed-price projects and 1,023 time-based projects matched on a comprehensive list of observable characteristics, we provide evidence that employers’ preference for experienced workers decreases after the introduction of the monitoring system. Consistently, we find that the introduction of the monitoring system increases the number of bids on time-based projects by 22.4% and the incremental bids come primarily from new entrants with no reputation (i.e., inexperienced workers) on the platform. Our additional analyses reveal that the monitoring system lowers the hiring price of labor and improves the on-time delivery performance of projects. Our results suggest that monitoring systems alleviate the cold-start problem on online platforms.

Keywords: cold-start problem, online platforms, monitoring systems, entry barrier, reputation systems