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.