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

39 Pages Posted: 11 Oct 2016 Last revised: 11 May 2021

See all articles by Chen Liang

Chen Liang

University of Connecticut - School of Business

Yili Hong

University of Houston - C.T. Bauer College of Business

Bin Gu

Boston University - Department of Management Information Systems

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2016

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

Suggested Citation

Liang, Chen and Hong, Yili and Gu, Bin, Does Monitoring Lead to a ‘Warm’ Start in Online Platforms? (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)

University of Connecticut - School of Business ( email )

2100 Hillside Road, Unit 1041
UConn School of Business OPIM
Storrs, CT Connecticut 06269
United States
06269 (Fax)

Yili Hong

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Bin Gu

Boston University - Department of Management Information Systems ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
99
Abstract Views
936
rank
188,828
PlumX Metrics