Should Gig Platforms Decentralize Dispute Resolution?

Abstract

Online labor platforms provide freelancers the opportunity to work for clients on a project basis. However, disputes can occur as a result of the platform users' attempts to game the system, disagreement on the work quality or uncertainty of the quality outcomes. Traditionally, the dispute would then have to be mediated by the platform's dispute team, which is often viewed to be unhelpful or biased. However, there are emerging platforms that promise to resolve the dispute with a novel tribunal system and relegate dispute resolution to individual platform users through a voting mechanism. We are interested in examining the dispute resolution models used by both the traditional online platforms (i.e., the centralized dispute system) and the emerging online platforms (i.e., the decentralized dispute system). Our results suggest that the decentralized dispute system outperforms the centralized dispute system when the freelancer's skill level is sufficiently high, the client's quality standard is lower, or the task is associated with a lower degree of quality uncertainty. Thus, gig platforms should consider switching to the decentralized dispute system only if they are able to attest to the freelancers' skill level, or they cater to less strict clients or more standardized tasks. Moreover, the decentralized dispute system can be more appealing to policy makers because it can induce a more socially optimal quality level of the freelancer. In addition, we also find that the platform can further improve its revenue under the decentralized dispute system by charging dispute fees to both the freelancer and the client when the freelancer's skill level is moderately high.