Labor Cost Free-Riding in the Gig Economy

42 Pages Posted: 18 Feb 2021 Last revised: 1 Jun 2021

See all articles by Zhen Lian

Zhen Lian

Cornell University - Samuel Curtis Johnson Graduate School of Management

Sebastien Martin

Northwestern University

Garrett van Ryzin

Amazon

Date Written: January 29, 2021

Abstract

We propose a theory of gig economies in which workers participate in a shared labor pool utilized by multiple firms. Since firms share the same pool of workers, they face a trade-off in setting pay rates; high pay rates are necessary to maintain a large worker pool and thus reduce the likelihood of lost demand, but they also lower a firm’s profit margin. We prove that larger firms pay more than smaller firms in the resulting pay equilibrium. These diseconomies of scale are strong too; firms smaller than a critical size pay the minimal rate possible (the workers’ reservation wage), while all firms larger than the critical size earn the same total profit regardless of size. This scale disadvantage in labor costs contradicts the conventional wisdom that gig companies enjoy strong network effects and suggests that small firms have significant incentives to join an existing gig economy, implying gig markets are highly contestable. Yet we also show that the formation of a gig economy requires the existence of a large firm, in the sense that an equilibrium without any firms participating only exists when no single firm has enough demand to form a gig economy on its own. The findings are consistent with stylized facts about the evolution of gig markets such as ridesharing.

Keywords: Gig economy, economies of scale, wage equilibrium, free-riding, queueing

JEL Classification: L11, J49, D24

Suggested Citation

Lian, Zhen and Martin, Sebastien and van Ryzin, Garrett, Labor Cost Free-Riding in the Gig Economy (January 29, 2021). Available at SSRN: https://ssrn.com/abstract=3775888 or http://dx.doi.org/10.2139/ssrn.3775888

Zhen Lian (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Sebastien Martin

Northwestern University

2001 Sheridan Road
Evanston, IL 60208
United States

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