Is Ignorance Bliss? Sealed Versus Open Auctions in Online Labor Markets

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Abstract
Online labor markets routinely employ auction mechanisms to assist the project providers (i.e., buyers or employers) in recruiting eligible participants (i.e., sellers or workers) who have placed bids in either sealed or open auctions. In a sealed auction, participants know only the number of competitors, but not their profiles and bidding amounts. Conversely, in an open auction, all this information is public. To understand which auction format results in more optimal allocation (i.e., effectively matching buyers and sellers) and greater time efficiency, we build a theoretical model to generate a series of hypotheses, then test these hypotheses using data from an abrupt change of auction format in an online labor market. Our findings indicate that in sealed auctions, where sellers cannot observe their competitors' bids, they tend to place lower bids and bid more quickly than sellers in open auctions. Additionally, the effect of auction format switching is less pronounced for experienced sellers compared to new sellers. The empirical results align with our theoretical explanation: In open-bid auctions, sellers have strong incentives to delay bidding or place initial bids higher than their valuation to learn from competitors' bids and adjust accordingly (if there is a chance). This strategic bidding behavior can lead to misallocation and time inefficiency. Specifically, while open auctions attract more participants, buyers take longer to make hiring decisions, and the likelihood of hiring decreases. Furthermore, sealed auctions result in better project completion and fewer seller exits.

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