The Screening Role of Auction Design Parameters in Online Service Outsourcing Platforms
53 Pages Posted: 1 May 2018 Last revised: 3 Feb 2021
Date Written: April 2, 2018
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
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