When Cost-Cutting May Go Wrong? Evidence from a Natural Experiment in Food Delivery

Abstract

Cost-cutting is a central theme for many online service delivery platforms in which they induct freelance workers at a lower wage than was previously prevalent in the system. As workers engage in within-organization wage referencing, this induction can have behavioral implications for the existing workforce. In a natural experiment setting, partnering with a food delivery service in India, we shed light on these anticipated behavioral effects. We find that introduction of a lower-waged peer group can lead to significant unproductive behavior of the existing high-wage workers in the form of a 2.3% increase in food order rejection (86% higher than the baseline rejection rate). This effect however, can be mitigated by recognition (e.g., higher customer ratings) and exacerbated by a negative experience on the platform (e.g., higher customer cancellations). Counterintuitively, we find that such detrimental effects cannot be mitigated effectively by monetary incentives. Our result has a key message for the managers: economic changes can have behavioral consequences and non-monetary solutions can have a stronger lever to reduce workers' unproductive behavior under cost-cutting initiatives which may promote a feeling of “it may happen to me as well” among the existing workforce.