Effects of IT-enabled monitoring systems in online labor markets

This paper investigates how IT-enabled monitoring systems mitigate moral hazard in an online labor market and their effect on market competition. We exploit a quasi-experiment at Freelancer when it introduced enhanced offline tracking features in 2015. Using a large dataset including 17,827 fixed-price projects and 8,563 hourly projects, we use a difference-indifferences (DID) approach to identify the treatment effect of the implementation of IT-enabled monitoring systems on employer contractor choice, employer surplus and market competition. We found that the IT-enabled monitoring system lowers the employers' preference for high-reputable bidders, and thus reduces the reputation premiums. Meanwhile, comparing the trend of fixed-price projects, the implementation of the monitoring systems increased the number of bids by 17.4% and increased employer surplus in hourly projects by 21.5%. Our result suggests that IT-enabled monitoring systems have a significant effect on alleviating moral hazards, reducing agency costs, and facilitating market competition.