Enabling vs. Controlling
In an increasing number of industry sectors, firms establish how much control to give professionals over the provision of their services to clients.
The last decade has brought a rapidly increasing number of firms in these industries that take advantage of information technologies to enable independent professionals to connect directly with customers, such that professionals control some or all of the relevant decisions
This study analizes the tradeoffs that arise in choosing between a traditional mode (where the firm takes control of service provision) and a platform mode (where professionals retain control over service provision).
The choice of mode is determined by the need to balance two-sided moral hazard problems arising from investments that only professionals can make and investments that only the firm can make, while at the same time minimizing distortions in decisions that either party could make (e.g., promotion and marketing of professionals’ services, price setting, choice of service offering, etc.).
The model captures that both professionals and the firm typically add value to the services offered to clients. Specifically, each makes a costly and non-transferable investment (or effort) decision which raises the revenue that can be obtained from clients. This creates a two-sided moral
hazard problem for the firm. This reflects that it may be easier for a firm to change its business model than its basic infrastructure.
Furthermore, the focus is not on offering general solutions to this class of problems, but rather to analyze the tradeoffs between the two modes of organization, both of which are unable to reach the first-best.
The analysis is also relevant to current legal and regulatory debates about whether “sharing economy” service marketplaces should be forced to treat professionals that work through them as employees rather than independent contractors. In particular, all existing legal definitions emphasize control rights as the most important factor in determining this issue.