The Screening Role of Design Parameters for Service Procurement Auctions in Online Service Outsourcing Platforms

Abstract

This paper provides a novel theoretical angle and robust empirical evidence demonstrating that the auction duration and the item description length are two essential auction design parameters that can function as screening mechanisms for bidder quality on online service outsourcing platforms. These outsourcing platforms use buyer-determined reverse auctions to find service providers. Using data from a major online outsourcing platform, we examine the effects of the auction duration and the item description length on both bidder entry (i.e., the number of bids and bidder quality) and contract outcomes (i.e., whether a project is contracted and the buyer’s expected utility from the winning bid) based upon the project- and bidder-level analyses. We find that auctions with longer durations and item descriptions attract more bids, but they also attract disproportionately more low-quality bidders, creating a double whammy of higher evaluation costs and adverse selection for buyers. This, in turn, leads to less successful contracting as well as lower buyer utility. Our research highlights the screening role of the auction duration and item description length for buyers on online service outsourcing platforms: by shortening auction durations and item descriptions, buyers can expect higher quality bidders, increase contracting probability, and enhance utility.