Tuesday, May 29, 2012

LAU Nelson, BART Yakov, BEARDEN J. Neil, TSETLIN Ilia
Exploding Offers Can Blow Up in More than One Way
INSEAD Working Paper 2012/56/MKT/DS revised version of 2011/100/DS

We investigate the use of exploding offers in hiring situations through behavioral experiments. The proposer chooses between issuing an exploding or extended offer, while the responder waits on a better outside alternative. An exploding offer must be accepted or rejected before discovering whether the better alternative will arrive; an extended offer allowsthe responder to first discover the outcome of the better alternative. If the proposer's offer is accepted, the responder can reciprocate, altering the proposer's payoff. Across multiple studies, a large proportion of proposers issued exploding offers though this resulted in substantially worse payoffs.Losses arose primarily from responders' negative reciprocation after accepting exploding offers. Decision makers exhibited behavioral consistency between their response to offers and the offers they issued. Participants may have overlooked potential negative reciprocity when choosing deadlines; we demonstrate that it is possible to make this factor more salient by encouraging explicit contemplation of the outcomes.