Exploding Offers Can Blow Up in More Than One Way

We study a game in which the proposer can issue an extended or exploding offer. The responder is waiting for a better alternative, and an exploding offer has to be accepted or rejected before the responder knows whether a better alternative will arrive. An extended offer allows the responder to wait and first learn about the outcome of a better alternative. The responder, after accepting the proposer’s offer, can reciprocate by altering the proposer’s payoff. In four experimental studies, we observe that many proposers chose to issue exploding offers, even though doing so results in substantially lower payoffs. The difference in payoffs is primarily due to the negative reciprocation that exploding offers engender, which we refer to at the curse of reciprocation. Our analyses suggest that the subjects who give exploding offers fall prey to a projection bias – i.e., to issue an exploding offer if one finds it acceptable to oneself. The main prescriptive conclusion for a proposer is that one needs to explicitly consider the potential curse of reciprocation when setting deadlines.