Skip to main content

Please enter a keyword and click the arrow to search the site

Capacity expansion in service platforms: financing vs. employment


Management Science and Operations

Publishing details

Social Sciences Research Network

Authors / Editors

Peura H;Yang S A


Publication Year



Service platforms connect consumers to independent service providers in a growing number of industries.In pursuit of further growth, platforms aimed to attract providers who do not yet possess the requisite assets to provide the service (e.g., cars for ride-hailing). In order to expand capacity, platforms have trialled innovative mechanisms, including financing the providers' investment and offering employment-like contracts. The viability of such programs remains an open question. We study a two-stage game-theoretic model with a platform and service providers, and two scenarios in terms of who invests in service assets. Under financing, the providers invest in assets, financed through either a bank or the platform. The platform subsequently sets the wage, and the providers decide whether to serve on the platform or an outside option. Under employment, the platform itself invests in asset capacity, and offers providers an exclusive employment contract. We find that conventional bank financing of the providers' investments results in both capacity under-investment and under-utilization due to a holdup problem. Simple interest-based platform financing can partly alleviate these inefficiencies, but suffers from free-riding when the providers also have access to bank financing. Platform financing incorporating an activity-based loan discount can mitigate these issues and benefit the platform, especially when the investment cost is high and the new providers' outside options are valuable. Compared to financing, the platform prefers employing providers when the investment cost is low, the market demand is high, and when the providers' outside options are unattractive. Our results reveal that both financing and employment can be viable options for service platforms to expand capacity, yet their success depends on both market conditions and contract terms (e.g., platform financing terms should be closely tied to providers' on-platform contributions).


Platform economy; OM-Finance interface; Capacity investment; Holdup; Free-riding


Social Sciences Research Network

Available on ECCH


Select up to 4 programmes to compare

Select one more to compare
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox


Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.