Employees versus Contractors: An Operational Perspective

Abstract

Problem definition: We consider a platform’s problem of how to staff its operations given the possibilities of hiring employees and setting up a contractor marketplace. We aim to understand the operational difference between these two work arrangement models. Methodology/results: We consider a model where demand is not only stochastic, but also evolving over time, which we capture via a state of the world that determines the demand distribution. In the case of employees, the platform controls the number of employee hours it uses for serving demand, while in the case of contractors it sets the wage paid to them per utilized hour. We show that while the employee problem is equivalent to a standard newsvendor, the contractor one corresponds to an unusual version of the newsvendor model where utilization is the control variable. Managerial implications: This distinction makes the contractor model more flexible, allowing us to prove that it performs significantly better, especially if the order of magnitude of demand is unknown. Meanwhile, hybrid solutions that combine both employees and contractors have complex optimal solutions and offer relatively limited benefits relative to a contractor marketplace.