Quality-Adjusted Consumer surplus for Online Labor Markets with Asymmetric Information

Traditional measures of consumer surplus (CS) have implicitly assumed that the quality expected is the same as the quality that is paid for ex ante. However, when product or service quality cannot be perfectly verified ex ante by consumers in markets with asymmetric information, and actual quality received may not necessarily equal quality expected, CS would not be precisely measured. In this paper, we propose a quality-adjusted measure of CS for IT outsourcing e-markets with asymmetric information. We first relax the assumption that consumers always receive the quality they expect ex ante. Second, we leverage expectationconfirmation theory to construct the utility function to derive the proposed quality-adjusted measure of CS. Measurement development is followed by an empirical study of the effects of different measures of CS. We found the quality-adjusted measure better predicts market outcomes, i.e., continuation, subsequent projects and payments.