An Empirical Study of Online Software Outsourcing: Signals under Different Contract Regimes

We study whether and how contractual arrangements (fixed price vs. time-and-materials contracts) change the effect of reputation, certification, and language characteristics on the chances of winning outsourcing contracts. Using a comprehensive dataset from an online outsourcing marketplace, we model how buyers choose among bidding vendors, and how the effects of these variables change under different contract forms. Our results show that online reputation is an important predictor of success only for fixed-price contracts, but not significant for times-and-materials contracts. In other words, contract forms can mitigate the typical Matthew Effect associated with online reputation systems. Contrary to popular belief, certifications do not increase the chances of winning regardless of the contract forms. Linguistic features of private communications from the vendor to the buyer also affect the chances of winning, and different dimensions have different effects when contract forms change. Our study is one of the first to study the interaction between contract formats and different signals that vendors can reveal to buyers in the competitive bidding process, and is also one of the first to investigate how texts of private communications affect buyers' contracting decisions.