Effects of IT-Enabled Monitoring on Labor Contracting in Online Platforms: Evidence from a Natural Experiment

38 Pages Posted: 11 Oct 2016

See all articles by Chen Liang

Chen Liang

Arizona State University (ASU), W.P. Carey School of Business, Department of Information Systems, Students

Yili Hong

Arizona State University (ASU) - W.P. Carey School of Business

Bin Gu

Arizona State University (ASU) - Department of Information Systems

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2016

Abstract

Two-sided platforms are typically plagued with asymmetric information, limiting market efficiency. Situated in the context of the increasingly popular online platforms for labor contracting (herein referred to as “online labor markets”), this paper investigates whether the implementation of an IT-enabled monitoring system mitigates moral hazard in online platforms and the consequences thereof. Our identification hinges on a natural experiment at Freelancer when it introduced an IT-enabled monitoring system with enhanced offline tracking features in August 2015. Based on a unique dataset including 17,827 fixed-price projects and 8,563 time-based projects matched on observable characteristics, we employ a difference-in-differences (DID) approach to identify the treatment effect of the monitoring system implementation on various outcomes from both the employer (demand) side and the contractor (demand) side, including employer contractor choice, platform entry barrier and employer surplus. We found that the implementation of the monitoring system lowers the employers’ preference for high reputation bidders in time-based projects, and thus reduces the reputation premiums and partially lowers the entry barrier for contractors who have not yet established a reputation on the platform. Specifically, using fixed-price projects as the baseline, on average, the implementation of the monitoring system increased the number of bids by 17.4% (primarily from bidders with no prior experience on the platform) and increased employer surplus in time-based projects by 21.5%. Our results testify the partial substitution relationship between reputation systems and monitoring systems, and suggest that IT-enabled monitoring systems have a significant effect on alleviating moral hazards, reducing agency costs, and intensifying supply-side platform competition.

Keywords: Platforms, Online Labor Market, Moral Hazard, Monitoring Systems, Reputation Systems, Entry Barrier, Contract Type

Suggested Citation

Liang, Chen and Hong, Yili and Gu, Bin, Effects of IT-Enabled Monitoring on Labor Contracting in Online Platforms: Evidence from a Natural Experiment (September 30, 2016). NET Institute Working Paper No. 16-01. Available at SSRN: https://ssrn.com/abstract=2844920 or http://dx.doi.org/10.2139/ssrn.2844920

Chen Liang (Contact Author)

Arizona State University (ASU), W.P. Carey School of Business, Department of Information Systems, Students ( email )

Tempe, AZ
United States

Yili Hong

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://yilihong.github.io/

Bin Gu

Arizona State University (ASU) - Department of Information Systems ( email )

Tempe, AZ
United States

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