When Does Dispute Resolution Substitute for a Reputation System? Empirical Evidence from a Service Procurement Platform

38 Pages Posted: 25 Sep 2019 Last revised: 24 Nov 2020

See all articles by Gordon Burtch

Gordon Burtch

University of Minnesota - Twin Cities - Carlson School of Management

Yili Hong

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

Senthil Kumar

University of Minnesota - Twin Cities

Date Written: November 23, 2020

Abstract

We consider the role of online dispute resolution (ex-post guarantees of supplier quality) when they are introduced in the presence of an online reputation system (an ex-ante informational mechanism), in the context of online service procurement platforms. We argue that dispute resolution will reduce buyers’ reliance on reputation systems in their hiring decisions to varying extents, depending on the nature of the work required. We assess these predictions using proprietary data capturing projects, service providers, bids, and hiring decisions around a natural experiment: the introduction of a new dispute resolution system at a major online service procurement platform. We provide evidence consistent with our expectations; introducing a dispute resolution system led buyers to reduce their consideration of service provider rating volumes in hiring decisions, particularly for projects where service provider performance could be evaluated objectively by a third-party (e.g., data entry, as opposed to more subjective, creative work, like logo design). We also report a variety of additional analyses, which demonstrate the robustness of our findings to alternative measures, dynamics of the effects depending on buyers’ experience with the dispute process, and the impact of the dispute service on buyers’ propensity to enter ratings of service providers. These findings provide empirical evidence that dispute resolution can be an effective, alternative means of mitigating supplier quality risks in online service procurement markets in place of ex-ante signals of provider quality. However, this is particularly true in settings where the output of work contracted can be objectively evaluated by a third-party.

Keywords: dispute resolution, online ratings, online service procurement, digital platforms

JEL Classification: J01, J23, J4, M51, M55, Z22

Suggested Citation

Burtch, Gordon and Hong, Yili and Kumar, Senthil, When Does Dispute Resolution Substitute for a Reputation System? Empirical Evidence from a Service Procurement Platform (November 23, 2020). Available at SSRN: https://ssrn.com/abstract=3436213 or http://dx.doi.org/10.2139/ssrn.3436213

Gordon Burtch (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Yili Hong

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

Houston, TX 77204-6021
United States

Senthil Kumar

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

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