Friday, February 4, 2011

Deadline Setting Decisions under Reciprocation Uncertainty: An Experimental Study
INSEAD Working Paper 2011/20/DS

We study the problem faced by a decision maker who must set a deadline for an offer to be accepted. There are two sources of uncertainty. First, he must estimate the probability of his offer being accepted under various deadlines. Second, he must estimate whether the recipient of an offer that is accepted will reward or punish him as a function of the deadline he set. We model the decision maker’s dilemma by embedding his decision problem in a game against another player, the responder. The responder is waiting for a better alternative, but an exploding offer must be accepted or rejected before discovering whether the better alternative will arrive. An extended offer allows the responder to first learn about the outcome of the better alternative. The responder, upon accepting the proposer’s offer, can reciprocate by altering the proposer’s payoff. In four experiments, we observe that many proposers issue exploding offers, even though this results in substantially lower payoffs. Differences in payoffs are primarily due to negative reciprocation towards exploding offers, which we term the reciprocation curse. Our analyses suggest that proposers giving exploding offers fall prey to projection bias – i.e., they issue exploding offers if they themselves would accept exploding offers. The main prescriptive conclusion for proposers is to consider explicitly the potential reciprocation curse when setting deadlines.