The Screening Role of Auction Design Parameters in Online Service Outsourcing Platforms

53 Pages Posted: 1 May 2018 Last revised: 3 Feb 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

Pei-Yu Chen

Arizona State University (ASU) - Department of Information Systems

Benjamin B. M. Shao

Arizona State University (ASU) - Department of Information Systems

Date Written: April 2, 2018

Abstract

This paper provides a novel theoretical angle and robust empirical evidence that auction duration and description are two essential auction design parameters that can function as a screening mechanism for bidder quality in online service outsourcing platforms. These outsourcing platforms use buyer-determined reverse auctions to find providers of services (primarily IT services). Using data from a major online outsourcing platform that connects buyers with bidders, we examine the effects of auction duration and description on both bidder entry (i.e., number of bids and bidder quality) and contract outcomes (i.e., whether a project is contracted and buyer’s expected utility from the winning bid) based upon not only the project-level but also bidder-level analyses. Our results show that auctions with longer durations and descriptions attract more bids (i.e., higher quantity of bidders) but they also attract disproportionately more low-quality bidders with lower completion rates (i.e., lower quality of bidders), creating a double whammy of higher evaluation costs and adverse selection for buyers. This, in turn, leads to contracting inefficiency in terms of less successful contracting as well as lower buyer utility. Our research provides empirical evidence that auction duration and description can play a screening role for buyers on online outsourcing platforms for service procurement.

Keywords: auction design, auction duration, auction description, bidder entry, screening, outsourcing

Suggested Citation

Liang, Chen and Hong, Yili and Chen, Pei-Yu and Shao, Benjamin B. M., The Screening Role of Auction Design Parameters in Online Service Outsourcing Platforms (April 2, 2018). Available at SSRN: https://ssrn.com/abstract=3161216 or http://dx.doi.org/10.2139/ssrn.3161216

Chen Liang

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 (Contact Author)

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

Houston, TX 77204-6021
United States

Pei-Yu Chen

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

Tempe, AZ
United States

Benjamin B. M. Shao

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

Tempe, AZ
United States

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