Employees versus Contractors: An Operational Perspective

50 Pages Posted: 8 Jul 2021 Last revised: 18 May 2023

See all articles by Ilan Lobel

Ilan Lobel

New York University (NYU)

Sebastien Martin

Northwestern University

Haotian Song

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: July 1, 2021


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.

Suggested Citation

Lobel, Ilan and Martin, Sebastien and Song, Haotian, Employees versus Contractors: An Operational Perspective (July 1, 2021). NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3878215 or http://dx.doi.org/10.2139/ssrn.3878215

Ilan Lobel

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Sebastien Martin

Northwestern University

2001 Sheridan Road
Evanston, IL 60208
United States

Haotian Song (Contact Author)

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics