Exploding offers and unraveling in two-sided matching markets

Abstract

Many two-sided matching markets tend to unravel in time with transactions becoming ineciently early. In a two-period decentralized model, this paper shows that when a market culture allows rms to make exploding oers, unraveling is more likely to occur and lead to a less socially desirable matching outcome. A market with a larger uncertainty in early stages is not necessarily more vulnerable to the presence of exploding oers: the conclusion depends on the specic information structure. A market tends to be less vulnerable to exploding oers when there is an excess supply of labor. While a banning policy on exploding oers tends to be supported by high quality rms and workers, it can be opposed by those of low qualities. This explains the prevalence of exploding oers in practice.

Commitment and cheap talk in search deterrence

“…At the optimum, she endogenously commits to a high future price by postponing contracting with some today's buyers.3 Exploding offers have also drawn attention in the matching literature. As found byNiederle and Roth (2009),Fainmesser (2013), andPan (2018), exploding offers can facilitate market unraveling, or early contracting between firms and workers.C The RAND Corporation 2023.…”