Labor Cost Free-Riding in the Gig Economy

57 Pages Posted: 18 Feb 2021 Last revised: 9 Dec 2022

See all articles by Zhen Lian

Zhen Lian

Yale School of Management

Sebastien Martin

Northwestern University

Garrett van Ryzin

Amazon

Date Written: December 8, 2022

Abstract

We propose a theory of gig economies in which workers participate in a shared labor pool utilized by multiple firms. Firms 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 profit margins. Larger firms pay more than smaller firms in the resulting pay equilibrium, leading to a free-riding effect. Specifically, firms smaller than a critical size pay the minimal rate possible (the workers' reservation wage), and all firms larger than the critical size earn the same total profit regardless of size. Together, these results show that gig firms experience strong diseconomies of scale in labor cost. We also show formation of a gig economy requires the existence of a firm large enough to support a worker pool on its own. We then examine the implications of this wage equilibrium on the demand side of the market. When firms share workers but sell in independent product markets, it is a dominant strategy for firms to price to maximize the surplus they generate. This maximum surplus provides an endogenous measure of firm size. When firms are perfectly competitive in the same product market, market collapse (zero output) is the only equilibrium, which may lead to tacit collusion among the firms to avoid this outcome. Our findings are consistent with stylized facts about the evolution of gig markets such as ride sharing.

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 (December 8, 2022). Available at SSRN: https://ssrn.com/abstract=3775888 or http://dx.doi.org/10.2139/ssrn.3775888

Zhen Lian (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

Sebastien Martin

Northwestern University

2001 Sheridan Road
Evanston, IL 60208
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
988
Abstract Views
3,163
Rank
41,829
PlumX Metrics