Substitution Between Monitoring And Termutation
3.1. Substitution between monitoring and reputation
When the risk of moral hazard is high, the employer prefers to choose the contractor with a high reputation, because the reviews and feedbacks from previous employers help to alleviate information asymmetry and serve as signals of the reputable contractor’s expected effort level . However, when the IT-enabled monitoring system is available, the function of the reputation system might be substituted by the monitoring system because the monitoring system can lower the need for reputation signals in term of the contractors’ effort and cost uncertainty. First, due to the unobservability of the contractor’s effort, the employer regards the contractor’s reputation …show more content…
From the perspective of the supply side (contractors), reputable contractors tend to milk their reputation by charging the price premiums . However, such price premiums don’t sufficiently guarantee higher quality . In such cases, reputation helps to foster product differentiation of the reputable contractors’ service. Meanwhile, from the perspective of the demand side (employers), because of the potential moral hazard problems in online labor markets, employers are uncertain about the contractors’ effort without the monitoring system. Ergo, employers would pay price premiums to the reputable contractors  and even consider the reputation premiums as the cost of overcoming the moral hazard problems . However, since the monitoring system can alleviate the moral hazard problems and substitutes for reputation, there is no need for employers of hourly projects to pay such reputation premiums to address the moral hazard problems. Moreover, our argument is also supported by Allgulin and Ellingsen’s  finding that when monitoring is very precise, efficient and cheap, the agent’s utility reaches the minimum level and he/she becomes less capable of earning rents. When the agent can be monitored perfectly, any effort level can only be paid at the agent’s corresponding reservation wage . This argument is also supported by the Efficiency Wage Model, which predicts that intensive monitoring leads to low wage premiums [39-41]. Since employers no longer need to pay reputation premiums, we expect that employer surplus is higher after the introduction of an IT-enabled monitoring system. So we propose the following hypotheses:
H3a: After the IT-enabled monitoring tool is available, employers of hourly projects will be less willing to pay the reputation premium.
H3b: After the