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Advertising in Online Labor Markets: A Signal of Freelancer Quality?

Discussion Papers 2087, 32 S.

Jonas Hannane

2024

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Abstract

Freelancers face cold-start problems in online labor markets: getting hired is very difficult without ratings, while obtaining a rating is impossible unless already having been hired. According to economic theory and empirical evidence, advertising can serve as a signal of product quality for experience goods. As such, advertising might help skilled new freelancers without reputation on a platform to obtain a first job, by providing a quality signal to employers. This study empirically explores the role of advertising in online labor markets using transactional data from a major platform. While indeed newer freelancers tend to advertise, I find that buyers dislike ads once I control for the increased visibility of ads. This negative effect is amplified for new and unrated freelancers compared to already rated freelancers. Furthermore, I find that new freelancers who advertise do not perform significantly better in the long-run compared to similar freelancers who do not advertise. Taken together, my results contrast the hypotheses derived from signaling models of advertising.

Jonas Hannane

Ph.D. Student in the Firms and Markets Department



JEL-Classification: M37;J40;D82
Keywords: Online Labor Markets, Information Asymmetry, Reputation, Signaling, Informative Advertising

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