Exploding offers and unraveling in two-sided matching markets

Abstract

Many two-sided matching markets tend to unravel in time with transactions becoming inefficiently early. In a two-period decentralized model, this paper shows that when a market culture allows firms to make exploding offers, 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 offers: the conclusion depends on the specific information structure. A market tends to be less vulnerable to exploding offers when there is an excess supply of labor. While a banning policy on exploding offers tends to be supported by high quality firms and workers, it can be opposed by those of low qualities. This explains the prevalence of exploding offers in practice.