Monitoring and the Cold Start Problem in Digital Platforms: Theory and Evidence from Online Labor Markets

Abstract

In the realm of online labor platforms, addressing moral hazard is crucial. Reputation systems have been the conventional solution, yet they pose a cold-start problem for newcomers. Alternatively, monitoring systems provide real-time oversight to employers, directly tackling moral hazard. This study combines theory and empirical analysis using data from a leading online labor platform. We find that monitoring systems effectively reduce the cold-start problem, leading to a 27.8% increase in bids on projects, primarily from inexperienced workers. We further find that following the introduction of the monitoring system, employers’ preference for experienced workers diminishes, accompanied by an average reduction of 19.5% in labor costs, whereas we observe no significant decrease in project completion and review rating. Our results collectively suggest that monitoring systems alleviate the cold-start problem in online platforms and contribute to fostering a more inclusive online labor market.