Tuesday, September 27, 2011

Exploding Offers Can Blow Up in More than One Way
INSEAD Working Paper 2011/100/DS revised version of 2011/20/DS

We study a game wherein a proposer can issue either an extended or exploding offer. A 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 a proposer is to consider explicitly the potential reciprocation curse when setting deadlines.