Latest MIT Research Papers Study the Digital Economy, Performance Pay

Tuesday, January 2, 2018
Paula Klein

As online platform models gain acceptance, new design and business issues arise, too. Two new research papers from MIT Sloan post-doctoral associates examine the emerging digital economy concerns of online marketplace certification, and the economic value of on-demand ride-sharing platforms. A third postdoctoral paper studies the effect of performance pay on research productivity.

Xiang Hui, spoke about digital market Certification, Reputation and Entry, at a November 29, 2017 IDE seminar. Using eBay as the subject, Hui and his co-authors studied how quality-certification affects entry and product quality in markets. Using a policy change across 400-plus market segments on eBay, they  found that a more demanding certification process increases entry. In addition, the quality distribution of entrants gain fatter tails. The authors then discussed implications for the design of certification policies in markets. 

More broadly, they also discovered that encouraging and incentivizing high-quality sellers not only boosts customer satisfaction on the platform, but could also be important to economic innovation.

The Case for Ride-Sharing

The rise of ride-sharing platforms has prompted heated debates requiring thorough evaluation of the market to guide policy decisions. Meng Liu presented her findings on Demand and Consumer Surplus in the On-demand Economy: The Case of Ride Sharing, at the IDE seminar as well. The overarching question Liu and her co-author studied is how economic value is created by on-demand ride-sharing platforms. Using granular data on dynamic pricing and wait time on Uber and Lyft, and public data on taxi and public transit in New York City, the post-doctoral researchers estimated a discrete-choice demand model that allows substitution among transportation modes.

Three primary findings resulted. First, platform users actually gain 72 cents per dollar spent on the ride-share platforms. Second, so-called welfare gains are disproportionately higher in locations and during times that have been underserved by taxis and public transit. Third, approximately 64% of these gains come from dynamic pricing used by these platforms.

Focusing on the consumer side, the paper argues in favor of strong consumer welfare gains from the ride-sharing platforms. The vast majority of the surplus is due to shortened wait times that result from the better matching technology and the practice of dynamic pricing. Ride-sharing platforms are not simply taxis with an app, Meng said, and the highly regulated taxi system cannot implement dynamic pricing. The study shows that the most important margin lies in the complementarity between the technology and dynamic pricing, which likely contributes to the success of these platforms.

Pay-based Productivity

In her December 6, 2017 IDE seminar presentation, Erina Ytsma, described the "Effort and Selection Effects of Performance Pay in Knowledge Creation." She studied the effect of performance pay on research productivity using the introduction of performance pay in German academia as a natural experiment.

Ytsma compared changes in research productivity of a cohort of academics who receive performance pay, with a control cohort that receives flat wages. She found a positive effort effect amounting to a 12% to 16% average increase in research productivity.

More productive academics are more likely to select into performance pay, she said. Therefore, performance pay increases academic research output through both effort effects and selection effects. The effort effect is very heterogeneous (only relatively less-productive academics significantly increase their productivity) and occurs most strongly in response to implicit performance incentives, she noted.


A schedule of upcoming IDE seminars will be posted here.