Monday, September 23, 2013

About exploding offers

The academic job market is characterized by much uncertainty about the job candidates, at least in Economics where students who have yet to publish anything (in most cases) and have not even completed their studies are hired. The fact that they are supposed to be at the research frontier and that very few people, if any, can evaluate their potential makes it no surprise that recruiting committees stick to signals: who the dissertation adviser is, where the degree is from, and always glowing recommendation letters. When a recruiter has managed to identify a particularly good candidate, it does not want to let others benefit from this discovery. To avoid the job candidate from continuing to shop around, the typical strategy is to make an exploding offer: The offer letter is valid for, say, a week, and thereafter becomes void. This is quite frustrating for a candidate who may still be waiting for a preferred department to make its move, but this is well proven strategy for recruiting departments.

Mark Armstrong and Jidong Zhou show that this does not necessarily have to be so. Other options are to let candidates make a down-payment to keep a job offer alive or offer a bonus if they sign quickly (I am reinterpreting the papers results for my example). Yet, I do not think I have ever seen this happen, even a signing bonus. The model, which is actually about a seller who may offer a buy-now discount, ask for a deposit or make an exploding offer, highlights that the uncertainty about the outside options of the buyer (or the job candidate) is crucial. The search wants to deter the buyer from looking elsewhere. How much the uncertainty affects the buyer determines which strategy is best. In the case of the academic market, I guess this means that job candidates are very risk averse, thus the exploding offer strategy is optimal for the recruiters.

5 comments:

Anonymous said...

The market for senior, more established academic economists is very different, though. Job offers have no expiration date and have been known to be taken up after several years. No risk aversion comes into play in those cases.

Anonymous said...

I think the most important consideration for the hirer is that if the preferred candidate turns them down the next ranked candidates may already have got jobs elsewhere and they end up not being able to hire anyone good for that year. Therefore a very short deadline. I don't think it is that hard to identify who the strong candidates are, especially in the US economics junior market so I don't think that the "discovery" of a strong candidate is that valuable.

Anonymous said...

"I don't think that the "discovery" of a strong candidate is that valuable."

This could even be true, if only search committees and departments did not have additional constraints (as it is often the case, instead). For example, if they necessarily must hire someone from an underrepresented minority group in a specific subfield.

michael webster said...

When labor markets unravel and someone posits a technical solution, we should try to write a negotiation simulation that incorporates the ideas & see if it works out in practice.

stone said...

I agree with @2:24 PM .
"I think the most important consideration for the hirer is that if the preferred candidate turns them down the next ranked candidates may already have got jobs elsewhere and they end up not being able to hire anyone good for that year. "