When Does Dispute Resolution Substitute for a Reputation System? Empirical Evidence from a Service Procurement Platform

Abstract

We consider the role of online dispute resolution (ex‐post guarantees of supplier quality) when introduced in the presence of an online reputation system (an ex‐ante informational mechanism), in the context of online service procurement platforms. We argue that dispute resolution will reduce buyers’ reliance on reputation systems in their hiring decisions to varying extents, depending on the nature of the work required. We assess these predictions using proprietary data capturing projects, service providers, bids, and hiring decisions around a natural experiment: the introduction of a new dispute resolution system at a major online service procurement platform. We provide evidence consistent with our expectations; introducing a dispute resolution system led buyers to reduce their consideration of service provider rating volumes in hiring decisions, particularly for projects where service provider performance could be evaluated objectively by a third party (e.g., data entry, as opposed to more subjective, creative work, like logo design). We also report a variety of additional analyses, which demonstrate the robustness of our findings to alternative measures, dynamics of the effects depending on buyers’ experience with the dispute process, and the impact of the dispute service on buyers’ propensity to enter ratings of service providers. These findings provide empirical evidence that dispute resolution can be an effective, alternative means of mitigating supplier quality risks in online service procurement markets in place of ex‐ante signals of provider quality. However, this is particularly true in settings where the output of work contracted can be objectively evaluated by a third party.