Size Matters, So Does Duration: The Interplay Between Offer Size and Offer Deadline

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Size Matters, So Does Duration: The Interplay between Offer Size and Offer
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Size Matters, So Does Duration: The Interplay
between Offer Size and Offer Deadline
Zhenyu Hu
Department of Analytics & Operations, Business School, National University of Singapore, bizhuz@nus.edu.sg
Wenjie Tang
Business School and Institute of Operations Research and Analytics, National University of Singapore, wenjie.tang@nus.edu.sg
This paper investigates the interplay between offer size and offer deadline in a Stackelberg game involving a
proposer and responder. The proposer acts first by making an offer to the responder with a deadline, and the
responder, concurrently following a continuous time finite-horizon search for alternative offers, has to respond
to the proposer’s offer by the deadline. Taking into account the responder’s reaction, the proposer’s optimal
strategy can vary from an exploding offer—an offer that has to be accepted or rejected on the spot—to an
offer with extended deadline under different market conditions, proxied by characteristics of the alternative
offer distribution. In particular, the proposer should offer an exploding offer when the alternative offer market
is unfavorable to the responder, and the harsher it is, the smaller the offer size. On the other hand, when
the alternative offer market is favorable to the responder, the proposer can benefit from making a smaller
(compared to the exploding offer) non-exploding offer, and the more favorable the market, the smaller the
offer size and the longer the deadline. Our analysis is further extended to the case where the responder has
private knowledge of the alternative offers’ arrival rate, and we characterize the optimal strategy for the
proposer when she either makes a single offer or a menu of offers that serves as a self-selection mechanism.
In the latter case, the optimal menu of offers can be implemented as a sign-up bonus type of contract.
Key words : search theory, ultimatum, offer size, offer deadline, mean residual life order, sign-up bonus
1. Introduction
Individuals and firms frequently face the decisions of making and searching for offers in various
forms: e.g., consulting firms and investment banks extending job offers to freshly minted MBA
graduates who also wait for potential better offers, airlines giving discounts on certain routes and
online merchants providing price markdowns on selected products to consumers who are looking
for the best deal, acquiring firms making acquisition offers to target firms who might be talking to
other interested acquirers at the same time, or a buyer for an asset extending an offer to the seller
who is also seeking other interested buyers. Importantly, many of these offers also come with a
deadline. For example, job offers “explode” on a particular date; airline discounts are usually only
valid within a limited period; online flash sales sites such as Rue La La, Vente-privee, Vipshop,
or Monoqi only hold their sales for a fixed period of time (e.g., Ferreira et al. 2015); merger and
acquisition offers usually require a response before a certain deadline (e.g., Microsoft bidding for
1
2 Author: Article Short Title
Yahoo!, Ballmer 2008, and Amazon for Whole Foods, Morrell 2017); and real estate contracts
commonly include a clause stating that the purchase offer will remain in effect for 24 or 48 hours
(Lippman and Mamer 2012, Roth 2015).
Much attention has been given to the size of offers in the above mentioned scenarios: for instance,
the literature on firms’ pricing strategy in the face of consumers searching for alternatives (e.g.,
Armstrong and Zhou 2015, Ellison and Wolitzky 2012, Janssen and Parakhonyak 2014, Stahl
1989, Zhu 2011), or that of bargaining-search (e.g., Baucells and Lippman 2004, Chatterjee and
Lee 1998, Gantner 2008, Muthoo 1995, Wolinsky 1987). On the other hand, only a few studies
have investigated the duration of those offers (Lippman and Mamer 2012, Tang et al. 2009, Zorc
and Tsetlin 2020), and the joint consideration of both offer size and offer duration has not been
systematically investigated.
This separation in research interest might have been a fair reflection of the business practice. For
example, in a recruitment setting for large organizations, very often the human resources personnel
responsible for recruitment or a team in the department that is seeking to hire would be in charge
of screening job applicants, setting the deadline, and extending the job offer to the chosen job
applicant, whereas different human resources personnel specialized in compensation and benefits
calculate the offer package based on job description, industry standard, and the job applicant’s
qualification (French 2003). Similarly, during an airline promotion on certain routes, frequently
the marketing department decides on the promotion period, whereas the pricing department works
on the magnitude of the discount separately. Sales duration of online flash sales sites is not even
considered as a decision variable, but rather is fixed at, e.g., one to four days (Ferreira et al.
2015). On the other hand, in the past decades it has been becoming more and more common to
see recruitment practices that give job candidates considerable sign-up bonuses had they accepted
the job offer earlier (e.g., Porter et al. 2004, WorldatWork 2016) or sales practices that advice
the retailer to charge a higher price had the consumer not purchased the product during the
first encounter (e.g., Armstrong and Zhou 2015)—which point to the importance and potential
benefits of linking the size of the offer to its duration. Our work—perhaps for the first time in the
literature—draws attention to this issue and explores the interplay between these two important
decisions most commonly associated with an offer: offer size and offer deadline.
We model the above scenarios as an ultimatum offer game involving a proposer (such as the
consulting firms, airlines or online flash sales sites, acquiring firms, or buyers of assets) and a
responder (such as the MBA graduates, consumers, target firms, or sellers of assets). The proposer,
who has already settled on a particular responder, acts as a Stackelberg leader and makes an
offer to the responder with a specified offer size (such as monetary benefits for a job applicant,
a consumer’s net surplus from purchasing the retailer’s product, the acquiring price for a target
Author: Article Short Title 3
firm, or the price a buyer offers to the asset seller) and deadline. The responder is concurrently
involved in a search for other alternatives and needs to decide by the deadline whether to accept
the proposer’s offer, if he has not accepted any alternative offer.1
The responder’s optimal strategy is characterized by a reservation value policy. In particular,
at the time of the deadline, if the responder has not already accepted any alternative offer, he
accepts the proposer’s offer if and only if the given deadline is long enough or the offer size is large
enough. Factoring in the responder’s reactions, we analyze the proposer’s optimal strategies in three
practical scenarios which capture different degrees or aspects of control that the proposer might
have over the offer size and deadline decisions: when the proposer is allowed to manipulate (i) only
the deadline, (ii) only the offer size, or (iii) both the deadline and the offer size. We demonstrate
that (i) when the proposer is only allowed to vary the offer deadline (i.e., when the offer size is
fixed), it is optimal for her to set a shortest deadline that is acceptable to the responder. Moreover,
our comparative statics shows that for a larger given offer size, the corresponding optimal deadline
also becomes shorter. Interestingly, the other way around does not always hold. In particular,
(ii) when the proposer is only allowed to manipulate the offer size, given a longer deadline, she
might benefit from making an even larger offer. We characterize the proposer’s optimal offer size
for a given deadline and demonstrate its non-monotonicity in the length of the deadline—as the
given deadline increases, the optimal offer size first decreases and then increases. Finally, (iii) when
the proposer optimizes through both the offer size and the deadline, we suggest that both an
exploding offer—an offer that has to be accepted or rejected on the spot—and a non-exploding
offer (with a strictly positive deadline) can be optimal for the proposer—depending on the market
condition characterized by attributes of the alternative offer distribution. More specifically, when
the alternative offer market is unfavorable to the responder, the proposer should make an exploding
offer that exactly matches the responder’s expected value of continuing searching at the beginning
of the horizon, and the harsher the market, the smaller the offer size. On the other hand, when
the alternative offer market becomes fairly favorable to the responder, the exploding offer strategy
would have been too costly for the proposer. Instead, the proposer can benefit from a reduced offer
size (compared to the corresponding optimal offer size under the exploding offer strategy) with an
extended deadline, and the more favorable the market becomes, the smaller the offer size and the
longer the deadline.
Finally, we revisit the proposer’s joint optimization strategy by taking into account her uncer-
tainty about the responder’s type. In particular, we assume that the proposer believes the respon-
der’s alternative offer arrival rate to be either high or low, and we investigate two approaches of the
1
For the ease of illustration, throughout the paper we address the proposer as a female, and the responder as a male.
proposer: the proposer making a single offer or a menu of offers. In the (a) single offer approach, we
show that for a high-type responder the introduction of uncertainty always results in a smaller offer
size, whereas the deadline can be either longer or shorter depending on the degree of uncertainty.
Moreover, we characterize the opitmal (b) menu of offers, where the low-type (resp., high-type)
responder gets a larger (resp., smaller) size with a shorter (resp., longer) deadline. In this approach,
for the high-type responder, the introduction of uncertainty results in a smaller offer size and a
longer deadline, so that the rent given away to the low-type responder is reduced, whereas for the
low-type responder, type uncertainty increases both the offer size and the deadline. We highlight
that the optimal menu of offers can be implemented as a sign-up bonus contract: the low-type
responder accepts the offer before the shorter deadline and receives a sign-up bonus, whereas the
high-type responder accepts the offer before the regular deadline to receive the regular offer size.
In the following we review the literature on related work in Section 2. Section 3 sets up the
model and provides results on the responder’s problem. The analyses of our model with respect to
the proposer are provided in Sections 4 and 5. Finally, we conclude in Section 6.
2. Literature Review
Our work is closely related to the economics of job search. Building on the seminal work of Stigler
(1961, 1962), a variety of theoretical models have been developed, and a number of empirical tests
with data from actual labor markets have been carried out (more recent developments are reviewed
in Mortensen 1986). Under standard search models (e.g., Burdett and Mortensen 1998, Lippman
and McCall 1976, Mortensen 1986, Mortensen and Neumann 1988, Van den Berg 1990), in each
period of the search process, a searcher receives an offer with a specified probability and needs to
decide whether to accept the offer on the spot or to continue searching.2 The offer sizes are often
treated as independently and identically distributed draws from a known distribution. As search
theory is applicable to a wide range of practical problems and is central to modern economics
(Lippman and McCall 1993), it has been used as a key element in other streams of literature. Our
model builds on this stream of work by also assuming that the responder is involved in a standard
search process over a continuous finite horizon.
Implicit in most standard search models is that the length of firms’ offer duration is not treated
as a decision variable (in most cases, firms make exploding offers that the searcher has to accept
or reject on the spot)—let alone the interaction with offer size. Tang et al. (2009) made the first
attempt to endogenize the offer duration, by treating the offer deadline as a decision variable at
2
There is another subset of the search literature in which the searcher has the option of recalling previously foregone
offers (e.g., Lippman and McCall 1976, Lippman and Mamer 2012), in which cases offers remain effective for the
entire search horizon.
the disposal of the firm (i.e., the proposer) who extends an offer to the job applicant (i.e., the
responder). Lippman and Mamer (2012) also investigated the proposer’s offer duration decision
by comparing two types of offers from the proposer—a “regular” offer that lasts until the end of
the search horizon and an “exploding” offer that explodes on the spot. Zorc and Tsetlin (2020)
extended Tang et al. (2009)’s setting by allowing both the proposer and responder to search for
alternatives. Moreover, they analyzed the proposer’s decision on when to make an offer in addition
to the duration of the offer. Importantly, the above mentioned work has not systematically taken
into consideration the offer size along with the offer duration.
Sometimes in practice, there is also room for negotiation, where the applicant might be able to
get additional time to make a decision or to ask for a larger offer. The bargaining-search literature
incorporates the search process with either Rubinstein (1982)’s alternating-offer bargaining model
(e.g., Chatterjee and Lee 1998, Chikte and Deshmukh 1987, Gantner 2008, Muthoo 1995, Wolinsky
1987) or with Nash bargaining model (e.g., Baucells and Lippman 2004). Note that in this literature,
the key objective is to find the equilibrium offers made by the firm and accepted by the searcher,
and the offer duration is still treated exogenous. Here, our focus is on endogenizing the offer size
and deadline that are assumed to be nonnegotiable.
Two-sided matching markets (Roth and Sotomayor 1992) are also related to our problem, and our
research is distinguished from this work in at least two important aspects. First, we are interested in
markets where the information about applicants and open positions is revealed sequentially rather
than simultaneously. Second, and most importantly, in the literature of two-sided matching neither
the length of the deadline nor the size of the offer given to applicants has been treated as a decision
variable. Although this setting of fixed offer size and deadline captures the characteristics in many
markets, for example the renowned kidney exchange market (e.g., Roth et al. 2004, 2005a,b) where
money exchange is illegal in most countries, it fails to do so in many other markets.
3. Preliminaries
In this section, we set up our model and present results with respect to the responder’s problem.
Although these results only make incremental contribution to the existing literature, they help to
build an intuitive understanding for readers not familiar with the search literature.
In most of what follows, we will frame the ultimatum offer game as a hiring problem, where
the proposer makes a job offer to the responder. In the online appendix, we demonstrate how our
model setup as well as results can be applied to a pricing problem.
3.1. Model Setup

We consider a game with two risk-neutral players, the proposer and the responder, over a continuous
finite horizon [0, T ]. The timeline of decisions and alternative offers’ arrival process is illustrated
in Figure 1. At time zero, the proposer moves first by making an offer with size s that expires at
deadline tD . The offer size in the hiring scenario can be, for example, the salary, bonus, or other
monetary benefits for a job applicant. Aside from the proposer’s offer package (s, tD ), the responder
is also involved in a search process for alternative offers in the market. The responder must decide
(a) whether to accept alternative offers if they arrive, and (b) whether to accept the proposer’s
offer at time tD . If the responder accepts the proposer’s offer before tD , he cannot accept any
other alternatives. Therefore, the responder will hold the proposer’s offer until tD , and then decide
whether to accept the proposer’s offer. If the responder accepts the proposer’s offer at deadline tD ,
he gets s; otherwise, he gets the expected value resulting from continuing searching, or value-to-go.
On the other hand, the proposer gets utility u > 0 at the cost of the offer size s if the responder
accepts her offer, and zero otherwise.
Proposer makes an offer Alternative offer X arrives

(s,tD) to responder with probability λδ+o(δ)
Time
0 t t+δ tD T
Responder decides on Responder decides on
accepting/rejecting X accepting/rejecting (s,tD)
Figure 1 Timeline of decisions and alternative offers’ arrival process
The alternative offers’ arrival is captured by a Poisson process with arrival rate λ. That is, over
any small interval δ > 0, the probability that an offer arrives is λδ + o(δ), that no offer arrives
is 1 − λδ + o(δ), and that more than one offer arrives is o(δ). We assume in the current setting
that both the responder and the proposer have perfect information about λ, and we will relax this
assumption for the proposer in Section 5. Following the underlying assumptions in standard search
models and their more recent applications (e.g., Lippman and McCall 1976, Tang et al. 2009, Zorc
and Tsetlin 2020), we also assume that all alternative offers are exploding ones with zero deadline.
Conditioned on an offer arrival, the size of the offer is modeled as a nonnegative continuous random
variable X independent of the time of arrival. In a way, X represents how the market values the
responder. We assume that X has support [a, b], where 0 ≤ a ≤ b, b 6= 0 (we allow b to be infinite).
The distribution function, complementary distribution function, mean, and standard deviation of
X are denoted respectively as F (·), F̄ (·), x̄, and σ, which are assumed to be common knowledge.
Note that when the proposer makes an offer is not considered as a decision variable. In our
setting, the proposer has no incentive to delay issuing the offer, since revealing the offer earlier can
help her fend off alternatives arriving to the responder. An alternative setting is discussed in Zorc
and Tsetlin (2020) where the proposer is also involved in a search process for alternatives and the
timing of making an offer becomes important.
3.2. The Responder’s Problem

At any time before and after the deadline, i.e., t ∈ [0, tD ) ∪ (tD , T ), the responder’s expected value
of continuing searching satisfies the following equations:
V (t) = λδE[max (X, V (t + δ))] + (1 − λδ)V (t + δ) + o(δ), t ∈ [0, tD ) ∪ (tD , T ). (1)
That is, during any time interval (t, t + δ), an alternative offer X arrives with probability λδ; if
the offer size is greater than the expected value of continuing searching, i.e., X > V (t + δ), the
responder accepts this offer and obtains terminal payoff X. Otherwise, the responder continues
to search and obtains V (t + δ). At t = T , there is no more alternative offer coming and hence
V (T ) = 0.
At the time of the deadline t = tD , the probability that an alternative offer arrives (at exactly
that point) is 0. Moreover, if the proposer’s offer is larger than the expected value of continuing
searching, the responder accepts it; otherwise, the responder continues searching. We denote the
right limit of V (t) at tD by v(tD ), and the value-to-go at tD becomes V (tD ) = max (s, v(tD )), where
v(tD ) = limδ→0+ V (tD + δ).
Note that if s < v(tD ), V (tD ) = v(tD ). In this case, the proposer’s offer will never be accepted, and
the responder’s value of continuing searching remains the same as those in a standard search model
(e.g., Lippman and McCall 1976), independent of s or tD . On the other hand, if s ≥ v(tD ), a discon-
tinuity is added to the responder’s value-to-go at the point of the deadline tD , and the responder’s
value-to-go will depend on the proposer’s decision (s, tD ) before tD . Throughout Sections 3 and 4,
we impose the constraint s ≥ v(tD ) to rule out the trivial case that the proposer makes an offer
that is destined to be rejected. Moreover, whenever we need to emphasize the dependence of V (t)
on (s, tD ), we will use V (t; s, tD ) to denote the responder’s value-to-go.
The next lemma offers solutions to the responder’s recursion problem. This result is consistent
with Theorem 1 in Van den Berg (1990), where the proposer’s offer was absent. (All proofs of the
main results are provided in the appendix.)
Lemma 1. When the proposer’s offer size is strictly below the upper bound of the alternative offer
distribution, i.e., v(tD ) ≤ s < b, the responder’s expected value of continuing searching is dependent
on the proposer’s choice of offer size and deadline, and is characterized as follows:
−1
T (T (s) + λ (tD − t)) , 0 ≤ t ≤ tD ,
V (t; s, tD ) = (2)
T −1 (λ (T − t)) , tD < t ≤ T,
where Z V
dv
, and L(v) ≡ E (X − v)+ .

T (V ) ≡ (3)
0 L(v)
Otherwise when s ≥ b, the responder simply accepts the proposer’s offer before tD to obtain s,

s, 0 ≤ t ≤ tD ,
V (t; s, tD ) =
T −1 (λ(T − t)) , tD < t ≤ T.
In both cases, v(tD ) = T −1 (λ(T − tD )) < b.
The function T in Lemma 1 can be interpreted as a value-to-time operator. More specifically, if

the responder is only facing an alternative offer process with arrival rate λ, then given a value V ,
T (V )/λ quantifies the length of the search horizon that the responder needs in order to generate
an expected value of V in his search.
The next lemma summarizes further properties of V (t; s, tD ).3
Lemma 2. The responder’s value-to-go V (t; s, tD ) has the following properties:

(i) Given s ≥ v(tD ), V (t; s, tD ) is decreasing in t for all t ∈ [0, T ].
+
(ii) Given s ≥ 0, V (t; s, tD ) is increasing in tD for tD ≥ (T − T (s)/λ) .
(iii) Given t ≤ tD , V (t; s, tD ) is increasing and convex in s for s ≥ v(tD ).
Following Lemmas 1 and 2, the responder’s strategy is captured by a threshold policy: At the
time of the deadline, if the responder has not accepted any alternative offer, the responder accepts
proposer’s offer if and only if the deadline is long enough, i.e., tD ≥ tD (s), or equivalently if the
offer size is large enough, i.e., s ≥ v(tD ), where
+
tD (s) ≡ (T − T (s)/λ) . (4)
Here, the threshold deadline tD (s) corresponds to the shortest acceptable deadline of the responder
in Tang et al. (2009) and Zorc and Tsetlin (2020). Moreover, by taking into account the proposer’s
offer size as another offer attribute, we show that the responder’s strategy can equivalently be
characterized by a minimum acceptable size, v(tD ). These two attributes of the proposer’s offer—
offer size and offer deadline—are compensatory to the responder (with respect to his value-to-go).
In particular, whereas the responder always prefers a larger offer with a longer deadline, a decrease
in one attribute can often be compensated by an increase in the other attribute.4
3
Throughout the paper, we refer to “decreasing” or “increasing” in the weak sense that includes the case of stay-
ing constant, unless specified as “strictly decreasing” or “strictly increasing”. Moreover, we refer to “positive” or
“negative” in the strong sense that excludes the case of equaling zero.
4
Nonetheless, the compensation effect is not always symmetric: Whereas a zero deadline can always be compensated
by a sufficiently large offer, an offer of size zero can rarely be made up for by a longer deadline.
4. The Proposer’s Problem

The responder accepts the proposer’s offer under two conditions. First, the alternative offers arriv-
ing on and before the deadline should be small enough such that the responder is better off contin-
uing searching than accepting any alternative offer, i.e., V (t) > X for all alternative offers received
before the deadline. Moreover, by the time of the deadline, the proposer’s offer needs to be large
enough (or equivalently, the offer deadline has to be long enough) such that the responder is better
off accepting the proposer’s offer than continuing searching, i.e., s ≥ v(tD ), or tD ≥ T − T (s)/λ.
Under the first condition, the arrival process of those alternative offers that the responder will
accept is a nonhomogeneous Poisson process with arrival rate λ P(X ≥ V (t)). The number of accept-
able arrivals during the time interval [t1 , t2 ], denoted as N (t1 , t2 ), is a Poisson random variable
Rt
with mean m(t1 , t2 ) = t12 λ P(X ≥ V (t)) dt. In particular, we define the average number of accept-
Rt
able alternative offers arriving during time [0, tD ] as m(0, tD ) = 0 D λP(X ≥ V (t))dt. Then, the
probability that the responder accepts none of the alternative offers during the period [0, tD ] is
Z tD
P(N (0, tD ) = 0) = exp[−m(0, tD )] = exp −λ P(X ≥ V (t))dt .
0

From (1), we have that V 0 (t) = −λ E (X − V (t))+ = −λ L V (t) , and
Z tD Z tD Z tD
dV (t) dL V (t)
m(0, tD ) = λ P (X ≥ V (t)) dt = − F̄ (V (t)) =
0 0 L V (t) 0 L V (t)
(5)
L V (tD ) L(s)
= log = log
L V (0) L V (0; s, tD )
where we have used L0 (x) = −F̄ (x) in the third step, and Lemma 1 in the last, i.e., V (tD ; s, tD ) = s.
The expected surplus of the proposer then becomes

L V (0; s, tD )
Π(s, tD ) = (u − s)P(N (0, tD ) = 0) = (u − s) , (6)
L(s)
and the proposer’s optimization problem can be characterized by two equivalent formats:
max Π(s, tD ) max Π(s, tD )
s,tD s,tD
(7)
s.t. v(tD ) ≤ s ≤ u, 0 ≤ tD ≤ T, s.t. tD ≥ T − T (s)/λ, s ≤ u, 0 ≤ tD ≤ T,
where the constraint s ≥ v(tD ) (or equivalently, tD ≥ T − T (s)/λ) makes sure that the second
condition for the responder to accept the proposer’s offer is satisfied. In addition, the constraint
s ≤ u guarantees that the proposer’s offer will not result in a negative expected surplus to herself.5
Although the proposer can theoretically vary both the offer size and the deadline to maximize
her expected surplus, in practice the decision maker that plays the role of the proposer might
5
It is possible that for some fixed tD ∈ [0, T ], u < v(tD ). In this case, there is no offer that is acceptable to the
responder and yet yields nonnegative payoff to the proposer at the same time, and the proposer can simply choose not
to make an offer at all and obtains zero payoff. Problem (7), however, always has a feasible solution (s, tD ) = (0, T ).
not have full control over both decision variables. As we have motivated in the introduction,
this can be caused by the fact that the two decisions, offer size and offer deadline, are made by
different personnel within the organization. Alternatively, the proposer’s decision might simply
be constrained by various exogenous factors such as industry standard, unwritten rules, or for
competitive reasons. For instance, real estate contracts commonly include a clause stating that the
purchase offer will remain in effect for 24 or 48 hours (Lippman and Mamer 2012, Roth 2015).
The judicial law clerks market is known to have exploding offers—offers that are withdrawn if
not accepted immediately, i.e., with deadlines equal to zero (Avery et al. 2007).6 And the current
practice for flash sales sites is to limit the sales to a period of one day to two weeks. Likewise, there
are also industry-wise standard offer packages for different levels of positions from which offers will
not deviate too far. In other recruitment settings, an employer might be constrained in a tight time
frame where there is hardly any space around the deadline.
To address these practical limitations, in Section 4.1, we explore the proposer’s optimal decisions
under two corresponding scenarios: (i) when the proposer is only allowed to vary the deadline, (ii)
when the proposer is only allowed to vary the offer size. We then return to problem (7) in Section
4.2 where the proposer can jointly optimize both the offer size and the deadline.
4.1. Optimal Decision for Exogenous Offer Size or Deadline

Exogenous Offer Size When the proposer is only allowed to vary the offer deadline, for any
fixed offer size 0 ≤ s ≤ u, the optimization problem (7) is modified into the following:
max Π(s, tD )
tD
(8)
s.t. tD ≥ T − T (s)/λ, 0 ≤ tD ≤ T.
Intuitively, whereas a longer deadline is more likely to prevent the responder from issuing a
plain rejection, it also increases the risk of losing the responder to an alternative offer. The next
proposition states that faced with this dilemma, the proposer should set the shortest deadline that
is acceptable to the responder. Zorc and Tsetlin (2020) covered a similar result.
Proposition 1. For any given size of offer 0 ≤ s ≤ u, it is optimal for the proposer to set the
deadline at the responder’s shortest acceptable deadline tD (s), i.e.,
+
t∗D (s) = tD (s) = (T − T (s)/λ) ,
where tD (s) is defined in (4). Moreover, t∗D (s) is decreasing in s.
6
Similarly, at some point in time in 1980s, the National Association for Law Placement in the U.S. also required that
if an offer was made to a student who had not yet completed the first year of law school, the offer had to remain
open until the end of the first semester, in December (Roth 2015).
Observe that when T − T (s)/λ ≥ 0 (or equivalently, s ≤ T −1 (λT )), we have from (2) that
V (t∗D (s); s, t∗D (s)) = v(t∗D (s)), i.e., the optimal deadline is the one that makes the responder indiffer-
ent between accepting the offer and continuing searching at the time of the deadline. That is, when
the proposer sets the deadline at t∗D (s), the responder’s value-to-go is such as if the proposer had
not interrupted the search process at all. In addition, we also note that since the proposer’s optimal
deadline is decreasing in the offer size, the offer deadline and offer size serve as “substitutes” to
the proposer—the proposer can make up for a small offer size by extending the offer deadline.
Exogenous Deadline When the proposer is only allowed to vary the offer size, for any fixed
deadline 0 ≤ tD ≤ T , the optimization problem (7) is modified into the following:
max Π(s, tD )
s
(9)
s.t. s ≥ v(tD ), s ≤ u.
To find out the optimal offer size, we first present the following lemma that provides a restricted
set of deadlines over which problem (9) has feasible solutions.
Lemma 3. Let t0 = inf {tD ∈ [0, T ] | v(tD ) ≤ u}. It is optimal for the proposer to make an offer if
and only if tD ∈ [t0 , T ].7
We now focus on the analysis of problem (9) when tD ∈ [t0 , T ]. We remark that in general Π(s, tD )
is neither concave nor quasi-concave in s (see Example 1 below for an illustration). However, we
manage to obtain a partial characterization of s∗ (tD ) in Theorem 1. Before presenting our results,
we first introduce two notations. Let

 b, u > b,
ŝ = {s ∈ [a, b] | E[X |X ≥ s] = u} , x̄ ≤ u ≤ b, (10)
 0, u < x̄.
To understand the interpretation of ŝ, first label those alternative offers whose values are higher
than the proposer’s offer as “competitive” alternative offers.8 Then E[X |X ≥ s] represents the
average value of those competitive alternative offers; intuitively, this is strictly increasing in s over
s ∈ [a, b], and E[X |X ≥ a] = x̄ and E[X |X ≥ b] = b. We then discuss three cases with respect to
the value of u: x̄ ≤ u ≤ b, u < x̄, and u > b. When x̄ ≤ u ≤ b, there exists a unique solution to the
equation E[X |X ≥ s] = u, s ∈ [a, b]. In this case ŝ can be interpreted as the proposer’s offer size such
that the average size of competitive alternative offers exactly matches the proposer’s utility from
obtaining the responder. On the other hand, when u > b or u < x̄, the equation E[X |X ≥ s] = u
7
It is possible that t0 = 0, in which case the proposer is always willing to make an offer regardless of what the given
deadline is. In particular, this happens if and only if the proposer’s utility from securing the responder is sufficiently
large, i.e., when u ≥ v(0).
8
We adapted the intuitive interpretation from Arnold and Lippman (2000) to our context.
does not yield a solution in [a, b] and ŝ is then chosen as the smallest point in [0, b] that makes
E[X |X ≥ s] closest to u. In all cases, note that ŝ ≤ u.
We also define s̃(tD ) as the smallest solution to the following problem
max Π(s, tD )
s
(11)
s.t. 0 ≤ s ≤ u.
Problem (11) is simply problem (9) without the constraint s ≥ v(tD ). Therefore, s̃(tD ) can be
interpreted as the optimal offer size given the deadline tD when the responder is compelled to
accept the offer at the time of deadline—even if the offer is below his value of continuing searching.
Theorem 1. Let

t , v(t0 ) ≤ ŝ, T, s̃(T ) = 0,
t= 0 ; t=
sup{tD ∈ [t0 , T ] | v(tD ) > ŝ}, v(t0 ) > ŝ, inf {tD ∈ [t0 , T ] | s̃(tD ) > v(tD )}, s̃(T ) > 0.
Then, t0 ≤ t ≤ t and the optimal offer size given the deadline satisfies

∗ v(tD ), t0 ≤ tD ≤ t,
s (tD ) =
s̃(tD ), t < tD ≤ T,
which is strictly decreasing on [t0 , t] and increasing on [t, T ]. In addition, if Π(s, tD ) is quasi-concave
in s, then
∗ v(tD ), t0 ≤ tD ≤ t,
s (tD ) =
s̃(tD ), t < tD ≤ T,
which is strictly decreasing on [t0 , t] and increasing on [t, T ].
One might expect a symmetric pattern between the optimal deadline given an offer size and the
optimal offer size given a deadline. Theorem 1 shows that when the given deadline is short, the
optimal offer size equals the minimum acceptable size, decreasing in the given deadline. In this
case, like in Proposition 1, the deadline and offer size can still be viewed as substitutes to the
proposer—a larger offer compensates for a shorter deadline to win over the responder. However,
we also highlight in Theorem 1 that when the deadline is long, the minimum acceptable size is
no longer sufficient and the proposer is better off by making offers that are strictly above the
minimum. In this scenario, the deadline and offer size become complements to the proposer—a
longer deadline requires an even larger offer.
The intuition behind this is as follows. As discussed previously, the proposer faces two types of
risk in the order of time: that the responder has already received a (better) alternative offer by
the time of the deadline, and that the responder does not accept the proposer’s offer on the spot
of the deadline. Note that the magnitude of these two type of risk are respectively proportional to
the length of time before and after the deadline. When the given deadline is relatively short, the
latter risk outweighs the former, and therefore the proposer focuses her attention on making sure
that the offer size beats the responder’s value-to-go, which is increasing in the length of time after
the deadline and consequently is decreasing in the deadline. On the other hand, when the given
deadline is relatively long, the former risk prevails over the latter, and the proposer aims at fighting
off the alternative offers arriving before the deadline. This threat from the alternative offers grows
as the deadline gets longer, and thereby the proposer’s optimal offer size increases in the deadline.
Our results also have important practical implications. First of all, we show that the decision
on the offer size should not be made independently even in scenarios where the duration of the
offer cannot be optimized together with the size, e.g., in flash sales sites or other retailing setting
where the promotion period has already been decided, or in a hiring setting where due to external
constraints, the offer cannot linger at the job candidate for longer than, say, two weeks. Rather,
the information of the fixed offer duration has to be taken into account while deciding on the offer
size. Moreover, our results imply that a longer promotion period might sometimes require even
heavier discounts than a shorter promotion period, driven by the fact that in this longer period,
consumers are more likely to find better deals from alternative sources.
Note that when Π(s, tD ) is quasi-concave in s, Theorem 1 establishes a stronger claim that an
offer with minimum acceptable size is optimal if and only if the exogenous deadline is shorter than
t. Without the quasi-concavity condition, Theorem 1 is silent about the optimal offer size in the
region [t, t]. The next proposition provides a sufficient condition for the quasi-concavity of Π(s, tD ).
Proposition 2. If X has decreasing hazard rate, then Π(s, tD ) is quasi-concave in s.
Distributions with a decreasing hazard rate (DFR) include Pareto, exponential, Weibull (when its
parameter k < 1), and the upper part of lognormal and Burr distribution. In particular, distribu-
tions with DFR are known to fit well empirical data of incomes in the upper levels, as they reflect
the fact that more incomes may help to earn more and thereby decrease the hazard rate (e.g.,
Singh and Maddala 1976).
Next we illustrate Theorem 1 and Proposition 2 under a special scenario that is similar to the
one described in Tang et al. (2009), where all alternative offers have the same size. In this case,
Π(s, tD ) is not quasi-concave in s. We then complement it with another example where the value of
the alternative offer is drawn from an exponential distribution and Π(s, tD ) is quasi-concave in s.
Note that consistently, the alternative offer distribution in the first case does not have a DFR (its
hazard rate function is not well defined) whereas the exponential distribution does. Details with
respect to the computation of the examples are also provided in the online appendix.
Example 1 (Deterministic Alternative Offer Size). We assume that the alternative
offer follows a degenerate distribution, i.e., X = x̄ almost surely. Note that this is the same as

requiring a = b = x̄. By Lemma 1, we compute that v(tD ) = x̄ 1 − e−λ(T −tD ) . For the ease of expo-
sition, we assume u > x̄ so that u > v(tD ) for any tD ∈ [0, T ] and hence t0 = 0, i.e., the proposer
should always make an offer. From (6) we compute the proposer’s expected surplus as

u − s, s ≥ x̄,
Π(s, tD ) =
(u − s) exp(−λtD ), s < x̄.
For a given tD , Π(s, tD ) consists of two strictly decreasing linear functions in s with a positive jump
at s = x̄. Clearly, this is not a quasi-concave function. We solve for s̃(tD ) as
0, tD ≤ − log(1 − x̄/u)/λ,
(
s̃(tD ) =
x̄, tD > − log(1 − x̄/u)/λ.
By (10) and our assumption that u > x̄ = b, we have ŝ = x̄ > v(0). By definition, we have t = 0 and
− log(1 − x̄/u)/λ, x̄ ≤ u(1 − e−λT ),

(
t=
T, x̄ > u(1 − e−λT ).
Theorem 1 in this case only claims that s∗ (tD ) = s̃(tD ) = x̄ for tD > t. However, in this particular
example, we are able to directly solve s∗ (tD ) and derive the exact threshold for the two patterns
of behavior of s∗ (tD ). Define a threshold τ as
x̄
e−λT )/λ, x̄ ≤ u(1 − e−λT ),

− log(1 − u−x̄
τ=
T, x̄ > u(1 − e−λT ),
then we have
v(tD ), tD ≤ τ,
s∗ (tD ) =
x̄, tD > τ.
Even without Π(s, tD ) being quasi-concave in s, s∗ (tD ) in this example is still strictly decreasing in
[0, τ ] and increasing (in fact, constant) in [τ, T ]. We illustrate the behavior of s∗ (tD ) in Figure 2.
In particular, when the given deadline is short enough, i.e., tD ≤ τ , the proposer takes the bet that
no alternative offer would arrive before the deadline and makes an offer that is smaller than the
alternative offer—a strategy that becomes too risky when the deadline is long, i.e., tD > τ . In the
latter case, the proposer is better off by simply matching the alternative offer so that the responder
would immediately accept.
Example 2 (Exponential Alternative Offer Size). In this example, we investigate the
case where the alternative offer distribution is exponential with mean x̄, and then we have a = 0,
b = +∞, and F (x) = 1 − exp(−x/x̄). By Lemma 1, we compute v(tD ) = x̄ log (1 + λ(T − tD )). We
assume u > v(0) = x̄ log (1 + λT ) so that t0 = 0. By (6), we compute the proposer’s expected surplus:
exp(s/x̄)
Π(s, tD ) = (u − s) exp[−m(0, tD )] = (u − s) ,
exp(s/x̄) + λtD
u = 6; x
7 = 5; 6 = 1; T = 2 u = 6; x
7 = 2:5; 6 = 3; T = 2
6 6
$
s (tD ) s$ (tD )
s~(tD ) s~(tD )
v(tD ) v(tD )
5 5
4 4
O,er size: s
O,er size: s
3 3
2 2
1 1
0 0
0 0.5 1 1.5 2 0 0.5 1 1.5 2
Deadline: tD Deadline: tD
Figure 2 The optimal offer size given a deadline for Figure 3 The optimal offer size given a deadline for
Example 1 with t0 = t = 0 Example 2 with t0 = 0 and t = t
which is quasi-concave in s. Its stationary point s0 (tD ) satisfies9

x̄ exp(s/x̄)
s0 (tD ) = s | s + = u − x̄ .
λtD
By quasi-concavity of Π(s, tD ), we then have s̃(tD ) = s0 (tD )+ . Recall the definition of t as t = {tD ∈
[0, T ] | v(tD ) = s̃(tD )}, and by Theorem 1 the optimal offer size can be fully characterized as

∗ x̄ log (1 + λ(T − tD )) , 0 ≤ tD ≤ t,
s (tD ) =
s0 (tD )+ , t < tD ≤ T.
Figure 3 illustrates s∗ (tD ), where it first decreases and then increases in the given deadline.
4.2. Joint Optimization of Offer Size and Deadline

In this section, we investigate the proposer’s optimal strategies when she has full control of both
offer size and offer deadline.
4.2.1. Optimal Solution In order to optimize both decision variables, we first set tD to its
optimal value for any given s, and then maximize the proposer’s expected surplus over a single
variable s. In short, we solve problem (7) sequentially as

max Π(s, tD ) = max max Π(s, tD ) .
s,tD s tD
We have already shown in Section 4.1 that the solution to the inner maximization problem above
+
is t∗D (s) = (T − T (s)/λ) and it remains to solve for the optimal offer size given t∗D (s). Interestingly,
even though Π(s, tD ) may not be quasi-concave in s for a given tD , we establish in the next theorem
that Π(s, t∗D (s)) is quasi-concave and we fully characterize the optimal solution to problem (7).
9
Using the Lambert-W function (see, for instance, Corless et al. 1996), we can write s0 (tD ) in closed-form as s0 (tD ) =
u − x̄ − x̄W (exp((u − x̄)/x̄)/(λtD )), where W (·) denotes the Lambert-W function and is nonnegative on R+ .
Theorem 2. The proposer’s expected surplus Π(s, t∗D (s)) is quasi-concave in s and her optimal
strategy profile (s∗ , t∗D ) is characterized as follows:
s∗ = min T −1 (λT ), ŝ , and t∗D = t∗D (s∗ ),

(12)
+
where ŝ is defined in (10) and t∗D (s) = (T − T (s)/λ) .
Theorem 2 shows that two types of strategies can be optimal for the proposer. When T −1 (λT ) ≤ ŝ,
+
s∗ = T −1 (λT ) and t∗D = (T − T (T −1 (λT ))/λ) = 0. In this case, the proposer makes an exploding
offer the size of which matches the responder’s value-to-go at time zero, and the responder will
be indifferent between searching for alternatives and accepting the proposer’s offer right away.
This way, the proposer is certain that the responder will accept her offer. Alternatively, when
T −1 (λT ) > ŝ, then s∗ = ŝ and t∗D > 0. In this case, the proposer chooses to take the risk that the
responder might accept an alternative offer before the deadline and make an offer smaller than
the responder’s value-to-go at time zero with a strictly positive deadline. Note that irrespective
of the relative magnitude of T −1 (λT ) and ŝ, we always have that T − T (s∗ )/λ ≥ 0 and hence
t∗D (s∗ ) = T − T (s∗ )/λ.
The next corollary points to the dependence of optimal offer on both u and λ.
Corollary 1. Keeping everything else the same, the proposer’s optimal strategy is characterized
by the following conditions:
(i) There exists a constant u0 ≥ 0 such that if u ∈ [0, u0 ), then the proposer makes an offer
with size s∗ = ŝ and a positive deadline t∗D , where s∗ increases and t∗D decreases in u; otherwise if
u ∈ [u0 , +∞), then the proposer makes an exploding offer with size s∗ = T −1 (λT ), constant in u.
(ii) There exists a constant λ0 ≥ 0 such that if λ ∈ [0, λ0 ), then the proposer makes an exploding
offer with size s∗ = T −1 (λT ), increasing in λ; otherwise if λ ∈ [λ0 , +∞), then the proposer makes
an offer with size s∗ = ŝ and a positive deadline t∗D , where s∗ is constant in and t∗D increases in λ.
Recall that u represents the proposer’s utility from obtaining the responder. Part (i) in Corollary 1
indicates that the more lucrative the responder is to the proposer, the more likely that she will act
aggressively and secure the responder by making a large exploding offer. Part (ii) in Corollary 1
reveals that a higher λ, on the other hand, makes it more likely that a non-exploding offer is
optimal. Note that as the responder searches more dilligently, keeping everything else the same,
he receives alternative offers more frequently, which corresponds to a higher λ. Hence, our result
implies that interestingly, the proposer should tone down her strategy as the responder searches
more intensively.
We next provide two examples, where the alternative offer’s size is either a fixed value or is
drawn from an exponential distribution, to illustrate Theorem 2, and to reveal factors—other than
the proposer’s utility u and the responder’s search intensity λ—that are driving the proposer’s
choice of offer size and offer deadline.
Example 3 (Deterministic Alternative Offer Size). We follow the same setting as in
Example 1 where u > x̄ is assumed. In Example 1, we have computed v(0) = x̄(1 − e−λT ) < x̄, and
by Proposition 1, we have that t∗D (s) = (T + log(1 − s/x̄)/λ)+ . In particular, t∗D (s) = 0 if s ≥ v(0),
and t∗D (s) = T + log(1 − s/x̄)/λ if s < v(0). Correspondingly, we compute the proposer’s expected
surplus after she has chosen the optimal deadline given the offer size:
x̄e−λT , s < v(0),

u−s
Π(s, t∗D (s)) = x̄−s
u − s, s ≥ v(0),
which is quasi-concave in s, and the optimal solution is:
s∗ = x̄(1 − e−λT ), t∗D = 0.
That is, when the alternative offer size is deterministic, it is always optimal for the proposer to
make an exploding offer with the offer size that exactly matches the responder’s expected value of
continuing searching at time zero.
Example 4 (Exponential Alternative Offer Size). We follow the same setting as in
Example 2. The memoryless property of exponential random variable immediately gives that
E[X |X ≥ s] = x̄ + s for s ∈ [0, +∞), and as a result ŝ = (u − x̄)+ . We already knew from Example 2
that T −1 (λT ) = x̄ log (1 + λT ). Following Theorem 2, we compare ŝ and T −1 (λT ) and have that
u
x̄ log (1 + λT ) , x̄ ≤ 1+log(λT

∗ +1)
,
s = u
(u − x̄)+ , x̄ > 1+log(λT +1)
,
and correspondingly
u
x̄ ≤ 1+log(λT

0, ,
t∗D = + u
+1)
T − (exp((u − x̄) /x̄) − 1)/λ, x̄ > 1+log(λT +1)
.
Comparing Examples 3 and 4, we find that whereas it is always optimal for the proposer to make
an exploding offer when the responder’s alternative offer only takes one value, it is no longer the
case when there is some variability in the size of the alternative offers. Note that for an exponential
distribution x̄ represents both mean and standard deviation. Example 4 claims that when the mean
and standard deviation are small, the proposer makes an exploding offer with offer size T −1 (λT )
as in the case of Example 3. In contrast when x̄ is large, the proposer switches her strategy to one
with a smaller offer size (than T −1 (λT )) and a strictly positive deadline. Moreover, as x̄ increases,
the proposer cuts down her offer size even more while further extending the deadline.
4.2.2. Comparative Statics The above discussion leads to one intriguing question: How does
the alternative offer distribution impacts the proposer’s choice between an exploding offer and one
with a positive deadline?
We first introduce the concept of mean residual life order (Shaked and Shanthikumar 2007). For
a continuous random variable X with support [a, b], 0 ≤ a ≤ b, we define its mean residual life at
s, s ≥ 0, denoted M(s), as
E[X − s | X ≥ s], s ≤ b,
M(s) =
0, s > b.
The mean residual life indicates the average amount by which the proposer’s offer lags that of the
competitive alternative offers (i.e., those offers superior to the proposer’s offer). Intuitively, the fact
that one alternative offer distribution has a higher mean residual life than the other is a sign that
the former alternative is better than the latter. In particular, consider two nonnegative random
variables X1 and X2 with corresponding mean residual life M1 (·) and M2 (·). Then X1 is said to
be smaller than X2 in the mean residual life order, denoted as X1 ≤mrl X2 , if M1 (s) ≤ M2 (s) for
any s ≥ 0. The next lemma compares other measures of X1 and X2 given that X1 ≤mrl X2 .
Lemma 4 (Shaked and Shanthikumar 2007). Let x̄i , σi , and bi denote the mean, standard
deviation, and upper bound of the support of Xi , i = 1, 2, respectively. When X1 ≤mrl X2 ,
(i) x̄1 ≤ x̄2 , b1 ≤ b2 ;
(ii) E[(X1 − s)+ ] ≤ E[(X2 − s)+ ] for any s ∈ R;
(iii) if x̄1 = x̄2 , then σ1 ≤ σ2 .
Denote (s∗i , t∗D,i ) as the optimal offer package when the alternative offer size is Xi , i = 1, 2. Accord-
ingly, Ti (·), Li (·), and ŝi are defined as in (3) and (10). The following theorem addresses the question
of when the proposer is more likely to make an exploding offer or a non-exploding one.
Theorem 3. Consider two alternative offers X1 and X2 with X1 ≤mrl X2 . We have:

(i) If (s∗1 , t∗D,1 ) = (ŝ1 , T − T1 (ŝ1 )/λ) with ŝ1 < T1−1 (λT ), then (s∗2 , t∗D,2 ) = (ŝ2 , T − T2 (ŝ2 )/λ) with
ŝ2 < T2−1 (λT ). Here, s∗1 ≥ s∗2 and 0 < t∗D,1 ≤ t∗D,2 ;
(ii) If (s∗2 , t∗D,2 ) = (T2−1 (λT ), 0), then (s∗1 , t∗D,1 ) = (T1−1 (λT ), 0). Here, s∗1 ≤ s∗2 and t∗D,1 = t∗D,2 = 0.
Part (i) in Theorem 3 claims that if the proposer is making a non-exploding offer when the responder
is facing X1 , then when the responder is facing better alternative X2 (better in the sense of mean
residual life), the proposer should stick with a non-exploding offer with a lower offer size and
longer deadline. Part (ii) in Theorem 3, on the other hand, states that if the proposer is issuing an
exploding offer when the responder is facing X2 , then an exploding offer is still optimal when the
responder is facing worse alternative X1 , with a lower offer size. In general, Theorem 3 indicates
that the proposer should offer a non-exploding offer when the alternative offer market is more
favorable (with a higher mean residual life) to the responder, and the more favorable it is, the
smaller the offer size and the longer the deadline; on the other hand, the proposer should make an
exploding offer when the alternative offer market is less favorable (with a lower mean residual life)
to the responder, and the harsher the condition is, the smaller the offer size.
The solution in Example 4 serves as a perfect illustration of Theorem 3. Under an exponential
distribution when s ≤ b, we can compute M(s) = E[X − s|X ≥ s] = x̄, i.e., X’s mean residual life
is fully characterized by its mean. Consistent with Theorem 3, for a small x̄, we have that t∗D = 0
and s∗ = x̄ log(1 + λT ), the latter increasing in x̄, i.e., when X’s mean residual life is small or
equivalently when the market is unfavorable to the responder, the proposer makes an exploding
offer, and the harsher the condition, the smaller the offer size. On the other hand, when x̄ is large,
we have that t∗D = T − (exp((u − x̄)+ /x̄) − 1) /λ, increasing in x̄, and s∗ = (u − x̄)+ , decreasing in
x̄. In this case, the market is favorable to the responder, and the proposer makes an offer with
a positive deadline; in addition, as the market condition gets better, the proposer reacts with a
smaller offer size accompanied by a longer deadline.
Remark 1. Note that mean residual life order is a weaker stochastic order than hazard rate
order. In particular, hazard rate dominance implies mean residual life dominance (see Theorem
2.A.1. in Shaked and Shanthikumar 2007), i.e., X1 ≤hr X2 ⇒ X1 ≤mrl X2 . On the other hand, first-
order stochastic dominance would not be sufficient for Theorem 3 to hold. In addition, hazard rate
dominance also implies first-order stochastic dominance. Yet, there is no direct connection between
first-order stochastic dominance and mean life residual dominance.
Whereas the mean residual life order provides a neat base for characterizing the proposer’s
optimal decisions, it is less intuitive as a practical guideline. Moreover, mean residual life order is a
partial order, i.e., we cannot establish an order in the mean residual life sense for any two random
variables. As a complement to this, we next restrict our attention to the family of location-scale
distribution to explore the proposer’s optimal decisions. By focusing on the influence from the
mean or standard deviation of the alternative offer distribution, we are able to not only provide
more intuitive interpretations of the proposer’s optimal strategy, but also establish a complete
order among different alternative offer distributions.
Let be a random variable with mean zero, standard deviation one, and support [−κ, κ]. We
denote the associated distribution and probability density function as F0 (·) and f0 (·), respectively.
The value of the alternative offer can be written as X = x̄ + σ with support [x̄ − σκ, x̄ + σκ], and

X has distribution function F (x; x̄, σ) = F0 x−x̄
σ
(we will similarly use T (v; x̄, σ), L(v; x̄, σ), ŝ(x̄, σ)
to emphasize the dependence of the corresponding functions on x̄ and σ). This way, the mean and
standard deviation of X are x̄ and σ, respectively. To avoid negative value of alternative offers,
we restrain a = x̄ − σκ ≥ 0, and correspondingly we let b = x̄ + σκ. Note that the case with σ = 0
reduces to the deterministic example that we analyzed in Example 1 and 3. We may interpret x̄ as
the average market value, and σ the market volatility.
The next corollary summarizes how the optimal offer varies with respect to the mean of the
alternative offers.
Corollary 2. Define x̄0 = inf {x̄ ∈ [σκ, +∞) | T −1 (λT ; x̄, σ) ≥ ŝ(x̄, σ)}, and assume that has
increasing hazard rate. For any given σ > 0, if x̄ ∈ [σκ, x̄0 ), then the proposer makes an exploding
offer with offer size s∗ = T −1 (λT ; x̄, σ), which is increasing in x̄. On the other hand, if x̄ ∈ [x̄0 , +∞),
the proposer makes an offer with a positive deadline t∗D (x̄, σ) and an offer size s∗ = ŝ(x̄, σ), where
t∗D increases and s∗ decreases in x̄.
Under the assumption of increasing hazard rate, a higher mean would imply a smaller hazard
rate and consequently a higher mean residual life (recall that hazard rate dominance implies mean
residual life dominance). Corollary 2 then directly maps the results of Theorem 3 to a framework
with a more intuitive measure of the distribution, its mean. Figure 4 illustrates Corollary 2 in the
case when follows uniform distribution. In particular, when the average market value is low, the
< = 0:7; u = 3; 6 = 2; T = 2 < = 0:7; u = 3; 6 = 2; T = 2

3.4 2
t$D
3.2 1.8
1.6
3
1.4
2.8
O,er deadline: tD
1.2
O,er size: s
2.6 s$
s^ 1
v(0)
2.4
0.8
2.2
0.6
2
0.4
1.8 0.2
x
70 x
70
1.6 0
1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8
Average alternative o,er: x
7 Average alternative o,er: x
7
Figure 4 Changes of optimal offer size s∗ and t∗D with respect to x̄
proposer adopts a more aggressive strategy with an offer so attractive that wins over the responder
at the beginning of his search horizon, and the proposer keeps increasing her offer as the market
value increases. On the other hand, when the market value is higher than a threshold, it becomes
too costly for the proposer to keep adding her chips to get the responder on the spot. Instead, the
proposer opts for a more mild strategy that allows the responder some time for checking out other
alternatives. And as these competitors get stronger, the proposer becomes even more passive, with
an even smaller offer size accompanied by an even longer deadline.
We next investigate how the optimal offer varies with respect to the standard deviation of the
alternative offers.
Proposition 3. Define σ0 = sup {σ ∈ (0, x̄/κ] | E [x̄ + σ| ≥ 0] ≤ u} and σ1 =

sup {σ ∈ (0, x̄/κ] | T (x̄; x̄, σ) ≥ λT }. For any given x̄ > 0 and σ ∈ (0, x̄/κ], we have the following
properties for the optimal offer:
(i) Suppose x̄ ≥ u. The optimal offer size s∗ = 0 and the optimal deadline t∗D = T .
(ii) Suppose x̄ < u. When σ is small, i.e., σ ≤ min{σ0 , σ1 }, the proposer makes an exploding
offer with offer size s∗ = T −1 (λT ; x̄, σ), which is increasing in σ and is no greater than x̄. On the
other hand, when σ is large, i.e., σ > max{σ0 , σ1 }, the proposer makes an offer with offer size
s∗ = ŝ(x̄, σ), which is decreasing in σ and is less than x̄, and a positive deadline increasing in σ.
In the non-trivial case (ii) where the average market value does not exceed the proposer’s utility
from obtaining the responder, whether the proposer adopts the aggressive or the mild strategy
depends on the variability among the alternative offers. Such dependence is illustrated in Figure 5
for the case of uniform distribution. When the market is more volatile, the responder has a better
x
7 = 2:5; u = 3; 6 = 2; T = 2 x
7 = 2:5; u = 3; 6 = 2; T = 2
3.5 2
1.8
3 1.6
s$
s^ 1.4
v(0)
O,er deadline: tD
2.5 1.2
O,er size: s
2 0.8 t$D
0.6
1.5 0.4
0.2
<1 <0 <1 <0
1 0
0 0.2 0.4 0.6 0.8 1 1.2 1.4 0 0.2 0.4 0.6 0.8 1 1.2 1.4
Standard deviation: < Standard deviation: <
Figure 5 Changes of optimal offer size s∗ and t∗D with respect to σ
prospect in expectation (see also Lemma 12 in the appendix): Although a higher variability in
general is not necessarily linked to a more favorable prospect in general—as there can be both large
ups and large downs, such link holds in our case. This is because at any time, the responder always
has the option of continuing waiting, and hence will only benefit from the large ups and will not
hurt from the large downs.10 Had the proposer wanted to secure the responder in this case with an
exploding offer, she had to place a considerably high bid, which in turn would become too costly
10
A similar argument is made in Kwon (2010) for a stopping time problem under Brownian motion.
for the proposer. Therefore in this case, the proposer should opt for the mild strategy. In contrast
under a more stable market where the alternative offers are relatively similar to each other, the
responder has worse prospect in expectation, and consequently it is less costly for the proposer
to play aggressive. The findings in Proposition 3 are also consistent with the previous examples:
Whereas it is always optimal for the proposer to make an exploding offer when the responder’s
alternative offer only takes one value (Example 3), it is no longer the case when there is variability
in the size of the alternative offers (Example 4).
5. Uncertain Types of Responder

In Section 4, we have provided the optimal strategy for the proposer, and how that relies on
the exact input of a spectrum of external parameters such as the proposer’s utility from getting
the responder, the arrival rate of the alternative offer, or the alternative offer distribution. In
practice, however, decision makers in the role of the proposer might not have full information of
these particulars, which renders it difficult to determine the exact optimal offer. In this section,
we attempt to incorporate uncertainty around these previously assumed-to-be-known parameters
and examine how the proposer’s optimal strategy should react to the uncertainty. In particular, we
assume that the proposer is uncertain about the arrival rate of the responder’s alternative offers
such that she considers the arrival rate to be λH with probability p and λL with probability 1 − p,
where 0 ≤ λL < λH and 0 < p < 1. For simplicity, in the discussion below, we further assume that
the alternative offer X has support [0, +∞), i.e., a = 0 and b = +∞.
Given offer size s and offer deadline tD , the value of continuing searching for both types of
responders are respectively

T −1 (T (s) + λH (tD − t)) , 0 ≤ t ≤ tD ,
VH (t; s, tD ) =
T −1 (λH (T − t)) , tD < t ≤ T,
and
T −1 (T (s) + λL (tD − t)) , 0 ≤ t ≤ tD ,
VL (t; s, tD ) =
T −1 (λL (T − t)) , tD < t ≤ T,
where T (·) and L(·) are as defined in Lemma 1, and VH (t; s, tD ) ≥ VL (t; s, tD ). Correspondingly, we
define the shortest acceptable deadlines for these two types as
+ +
tH
D (s) ≡ (T − T (s)/λH ) and tLD (s) ≡ (T − T (s)/λL ) , where tH L
D (s) ≥ tD (s).
The impact of this uncertainty on the proposer also reflects in the probability that the responder
accepts the proposer’s offer at the time of the deadline. In particular, as before, let mi (0, tD ),
i = H, L, denote the average number of alternative offers that the responder will accept during
[0, tD ] when the responder is of type H or L, respectively,
Z tD
mi (0, tD ) = λi P (X ≥ Vi (t; s, tD )) dt, i = H, L.
0
From (5), the corresponding probabilities that the responder accepts s at tD become
L(VH (0; s, tD )) L(VL (0; s, tD ))

exp(−mH (0, tD )) = and exp(−mL (0, tD )) = . (13)
L(s) L(s)
Given the uncertainty towards the responder’s types, we next investigate two approaches of
the proposer: (a) designing one offer package (s, tD ), or (b) making a menu of offers (sH , tH
D ) and
(sL , tLD ), both with the objective of maximizing her expected surplus.
5.1. Single Offer

By offering a single offer package (s, tD ), the proposer’s expected surplus is written as
tD < tLD (s),


 0,
Π(s, tD ) = (u − s) [(1 − p) exp(−mL (0, tD ))] , tLD (s) ≤ tD < tH
D (s),
(u − s) [p exp(−mH (0, tD )) + (1 − p) exp(−mL (0, tD ))] , tD ≥ tH (s).

D
In particular, if the proposer’s deadline is shorter than the shortest acceptable deadline of the
responder with lower arrival rate, then neither type of responder will accept the offer at the deadline
and hence Π(s, tD ) = 0. On the other hand, if the deadline is longer than the shortest acceptable
deadline of the responder with higher arrival rate, then the proposer is able to capture both types
of responders. Finally, if the deadline lies in between, then only the responder with lower arrival
rate will accept the offer at the deadline, with probability exp(−mL (0, tD )).
We first establish that for a given offer size, the proposer’s optimal deadline will be either of the
two shortest acceptable deadlines.
Lemma 5. For a given offer size s, the proposer’s optimal deadline t∗D (s) is either tH L
D (s) or tD (s).
The proposer’s problem can now be written as
max max{Π(s, tH L
D (s)), Π(s, tD (s))}
s
(14)
s.t. 0 ≤ s ≤ u.
We then investigate the comparison between Π(s, tH L

D (s)) and Π(s, tD (s)) for a given offer size.
The trade-off between a longer deadline and a shorter one is clear: by definition the shorter deadline
maximizes the probability that the low-type responder accepts the offer, whereas the longer one
caters to both types of responders. For a given offer size s, the following lemma characterizes the
optimal deadline as we vary the lower arrival rate, λL .
Proposition 4. For a given offer size s ∈ [0, u], when λH > T (s)/T , there exist λL and λL ,
0 < λL ≤ T (s)/T ≤ λL < λH , such that the optimal deadline t∗D (s) = tH
D (s) if λL ≤ λL or λL ≥ λL ,
and t∗D (s) = tLD (s) if λL ∈ (λL , λL ). On the other hand, when λH ≤ T (s)/T , t∗D (s) = tH
D (s) always.
Note that given offer size s (and probabilities of responder’s types, p and 1 − p), the difference
between λH and λL can be interpreted as a measure of the proposer’s uncertainty about the
responder’s type. Proposition 4 extends Proposition 2 of Tang et al. (2009) to the case where
alternative offers are likely to arrive more than once and their sizes are drawn from a general
distribution rather than fixed. In particular, we show that when the proposer’s uncertainty about
the responder’s type is relatively small (in the sense that λH and λL are relatively close to each
other), the proposer should offer a longer deadline of tH
D (s), in hope of capturing both types of
responders. On the other hand, when this uncertainty is moderately large, i.e., λL ∈ (λL , λL ), a
shorter deadline of tLD (s) is instead optimal, as trying to catering to both types of responder might
have become too costly.
Moreover, the result on a third case adds more insights into the effect of type-uncertainty on the
proposer’s optimal deadline. In particular, we show that when the distance between λL and λH
is extremely large, the longer deadline again becomes optimal. Since we manipulate the distance
by fixing λH and varying λL , an extremely large distance would have pushed λL towards zero, in
which case there are almost no alternative offers arriving to the low-type responder, even if the
proposer extends the deadline beyond tLD (s), it is highly unlikely that a better alternative would
arrive to the low-type responder in this extended length of time. Therefore, the longer deadline
caters to both types of responders without increasing much the risk that the low-type responder
accepts an alternative offer. Importantly, note that this case would not have been plausible in Tang
et al. (2009), where the alternative offer arrives at most once.
Next, we examine the proposer’s optimal offer size as in problem (14). In particular, following
the previous measure of uncertainty, we will characterize the optimal offer size as a function of
λL , and we denote s∗ (λL ) and t∗D (λL ) to emphasize the dependence of the optimal solution on λL .
Let s∗H (λL ) and s∗L (λL ) be the smallest solution to the optimization problem max Π(s, tH
D (s)) and
max Π(s, tLD (s)), respectively. From (14), it is straightforward to see that s∗ (λL ) ∈ {s∗L (λL ), s∗H (λL )}.
In the case that s∗ (λL ) = s∗L (λL ), we have that t∗D (λL ) = tLD (s∗ (λL )). Since s∗L = vL (tLD (s∗ (λL ))) <
vH (tLD (s∗ (λL ))), this offer is destined to be rejected by the high-type responder, and hence effectively
the proposer is only making an offer to the low-type responder—our results in Section 4.2 then
directly apply. On the other hand, if s∗ (λL ) = s∗H (λL ) and t∗D (λL ) = tH ∗
D (s (λL )), then both types of
responders are likely to accept the offer, and hence we need to take into account the corresponding
probabilities for both types. It turns out that Π(s, tH
D (s)) may not be quasi-concave in s, which
makes it difficult to characterize s∗H (λL ), and subsequently s∗ (λL ). Nevertheless, we are able to
provide the comparative statics of s∗H (λL ) with respect to λL in the next lemma, and a partial
characterization of s∗ (λL ) in the subsequent proposition.
Lemma 6. The optimal offer size under the strategy of capturing both types, s∗H (λL ), is increasing
in λL . Moreover, the optimal offer size under the strategy of catering only to the low type is
s∗L (λL ) = min{T −1 (λL T ), ŝ}, where ŝ is as defined in (10), also increasing in λL .
Proposition 5. There exist λ1 and λ2 with 0 < λ1 < λ2 < λH , such that s∗ (λL ) = s∗H (λL ) and
t∗D (λL ) = tH ∗
D (s (λL )) for λL ∈ (0, λ1 ] ∪ [λ2 , λH ).
Consistent with the intuition from Proposition 4, for either very small or very large λL , i.e., when
the level of uncertainty is at the two extremes, it is optimal for the proposer to make an offer
that caters to both types of responders. We conjecture that for medium levels of uncertainty, it is
optimal for the proposer to focus on the low-type responder only.
Compared to the case when the proposer is only facing a high-type responder, in which case
by Theorem 2 the optimal offer size is min{T −1 (λH T ), ŝ}, Lemma 6 and the continuity of s∗L (λL )
and s∗H (λL ) imply that uncertainty in the responder’s type will always induce a lower offer size,
i.e., s∗ (λL ) ≤ min{T −1 (λH T ), ŝ}. Moreover, Proposition 5 shows that when the uncertainty is
either very small or very large such that s∗ (λL ) = s∗H (λL ), it also induces a longer deadline, i.e.,
∗ −1
tH H
D (s (λL )) ≥ tD (min{T (λH T ), ŝ}).
5.2. Menu of Offers

In this section, we examine the approach where the proposer makes a menu of two offers, (sH , tH
D)
and (sL , tLD ), that the responder can choose from at time zero. Moreover, we assume for the moment
that upon choosing one of the two offers, the responder will not be able to switch to the other,
though he is still able to turn down the chosen offer at any time before the deadline. At the end of
this section, we will show that the responder’s preference remains the same over time, and hence
at any time he has no incentive to switch to an offer different from his choice at time zero.
Let pH = p and pL = 1 − p, the proposer’s problem then becomes
X L(Vi (0; si , tiD ))
max pi (u − si )
si ,tiD
i=H,L
L(si )
s.t. si ≥ vi (tiD ), i = H, L; (IR) (15)
0
0
Vi (0; si , tiD ) ≥ Vi (0; si0 , tiD ), i 6= i ; (IC)
0 ≤ tiD ≤ T, 0 ≤ si ≤ u, i = H, L.
Here, the individual rationality (IR) constraints specify that the offer designed for each type is not
destined to be rejected, i.e., the responder will accept the offer as long as he is still available by the
time of the deadline. The incentive compatibility (IC) constraints, on the other hand, state that
the high-type (resp., low-type) responder does not have the incentive to pick the offer designed for
the low-type (resp., high-type) responder at time zero. The following lemma provides an equivalent
interpretation of the IC constraints.
Lemma 7. The incentive compatibility constraints in (15) are equivalent to
λH (tLD − tH L H
D ) ≤ T (sH ) − T (sL ) ≤ λL (tD − tD ),
which requires that sH ≤ sL and tH L

D ≥ tD .
The next proposition shows that at optimality the IR constraint for the high type and the IC
constraint for the low type must be binding.
Proposition 6. Let
+
+ T (sH ) T (sL )
tH
D (sH ) := (T − T (sH )/λH ) and tLD (sH , sL ) := λL
+ tH
D (sH ) − λL .
The optimal solution in problem (15) satisfy the following conditions:
0 ≤ sH ≤ vH (0), tH H
D = tD (sH ) = T − T (sH )/λH
T (sH ) T (sL ) (16a)
sH ≤ sL ≤ VL (0; sH , tH L L
D ), tD = tD (sH , sL ) = + tH
D (sH ) − ;
λL λL
or equivalently,
sH = vH (tH H
D ), 0 ≤ tD ≤ T
(16b)
sL = VL (tLD ; sH , tH L H
D ), 0 ≤ tD ≤ tD .
Figure 6 illustrates the essential steps to prove Proposition 6. An arbitrary feasible solution that
presumably satisfies both IR and IC constraints in problem (15), (tH L
D , sH ) and (tD , sL ), is shown
in Figure 6a. Moreover, the solid curve indicates the value-to-go of the high-type (resp., low-type)
responder taking the offer (tH L
D , sH ) (resp., (tD , sL )), whereas the dashed curve indicates the value-
to-go of the high-type (resp., low-type) responder taking the other offer (tLD , sL ) (resp., (tH
D , sH )).
For a given pair of (tH

D , sH ), the shaded area in Figure 6a shows all low-type offers that are incentive
compatible with the high-type offer (tH

D , sH ). Figure 6b demonstrates that one can increase the
proposer’s expected surplus by shortening the deadlines tH L

D and tD such that both the IR for the
high type and the IC for the low type become binding.
From Proposition 6, problem (15) can be simplified, as depicted in the following corollary.
T (sH )
Corollary 3. Let TL (sH ) := λL
+ tH
D (sH ). Problem (15) is simplified to
L(T −1 (λH T )) L(T −1 (λL TL (sH )))

max pH (u − sH ) + pL (u − sL )
sL ,sH L(sH ) L(sL )
s.t. −1
0 ≤ sH ≤ T (λH T ), (17)
sH ≤ sL ≤ T −1 (λL TL (sH )) .
Here TL (sH ) can be interpreted as the “prolonged” search horizon for the low-type responder.
Intuitively, as can be seen from Figure 6b, the low-type responder can always improve his value-to-
go by taking the high-type’s offer, which effectively extends his search horizon from T to TL (sH ).
The following theorem further characterizes the solution to problem (17).
7 = 2:5; 6L = 1; 6H = 3; T = 2; (tLD ; sL ) = (1:3; 4); (tH

x D ; sH ) = (1:75; 3:5) 7 = 2:5; 6L = 1; 6H = 3; T = 2; (tLD ; sL ) = (1:3; 4); (tH
x D ; sH ) = (1:75; 3:5)
6 6
5 5
Value of continuing searching: V (t)
Value of continuing searching: V (t)

4 (tLD ; sL ) 4 (tLD ; sL )
(tLD (sH ; sL ); sL )
(tH
D ; sH ) (tH
D ; sH )
(tH
D (sH ); sH )
3 3
2 2
vL (t)
vH (t)
1 1 vL (t)
VL (t; sH ; tHD)
VH (t; sH ; tH vH (t)
D)
VL (t; sL ; tLD ) VL (t; sH ; tH
D (sH ))
VH (t; sL ; tLD ) VH (t; sH ; tH
D (sH ))
0 0
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2
Time: t Time: t
(a) A feasible menu of offers: (tH

D , sH ) and (b) Improving proposer’s expected surplus by
L
(tD , sL ) shortening the deadlines tH L
D and tD
Figure 6 Illustration of Proposition 6
Theorem 4. Let (s∗H , tH∗ ∗ L∗

D ) and (sL , tD ) denote the optimal offers for the high-type and low-type
responder, respectively. We have that
s∗H ≤ min{T −1 (λH T ), ŝ} and tH∗ H ∗

D = tD (sH ),
where ŝ is as defined in (10). Furthermore, if s∗H = T −1 (λH T ), then s∗L = s∗H = T −1 (λH T ) and
∗ −1
tH∗ L∗
D = tD = 0. If, on the other hand, sH < T (λH T ), then s∗H < min{T −1 (λH T ), ŝ}, and
s∗L = min{T −1 (λL TL (s∗H )) , ŝ} and tL∗ L ∗ ∗

D = tD (sH , sL );
moreover, we have that s∗L > s∗H and tD

L∗
< tH∗
D .
It is interesting to contrast the optimal menu of offers characterized in Theorem 4 with The-
orem 2, the latter stipulating that when the proposer is facing a high-type (resp., low-type)
responder without any uncertainty, she should issue an offer with size min{T −1 (λH T ) , ŝ} (resp.,
min{T −1 (λL T ) , ŝ}) and deadline tH
D (min{T
−1
(λH T ) , ŝ}) (resp., tLD (min{T −1 (λL T ) , ŝ})). Theo-
rem 4 directly shows that for the high-type responder, the introduction of uncertainty results in
a smaller offer size and a longer deadline, so that the rent given away to the low-type respon-
der is reduced. On the other hand for the low-type responder, type uncertainty increases both
the offer size and the deadline. To see this, note that since T −1 (λL TL (s∗H )) ≥ T −1 (λL T ), s∗L =
min{T −1 (λL TL (s∗H )) , ŝ} ≥ min{T −1 (λL T ) , ŝ}; moreover, tL∗ L
D ≥ 0 = tD (min{T
−1
(λL T ) , ŝ}) if ŝ ≥
T −1 (λL T ), whereas if ŝ < T −1 (λL T ) ≤ T −1 (λL TL (s∗H )), tL∗ L ∗ ∗ L ∗ L
D = tD (sH , sL ) = tD (sH , ŝ) > tD (ŝ) =
tLD (min{T −1 (λL T ) , ŝ}). Intuitively, since it is always convenient for the low-type responder to
improve his value-to-go by taking the high-type’s offer, the proposer has to come up with an offer
that is good enough to match the low-type responder’s improved value-to-go.
Finally, we note from the proof of Lemma 7 that IC constraints, VH (0; sH , tH L

D ) ≥ VH (0; sL , tD )
and VL (0; sL , tLD ) ≥ VL (0; sH , tH L

D ), are satisfied if and only if for all t ≤ tD
VH (t; sH , tH L L H
D ) ≥ VH (t; sL , tD ), VL (t; sL , tD ) ≥ VL (t; sH , tD ).
That is, for any feasible solution to problem (15), the high-type (resp., low-type) responder has
no incentive to take the offer designed for the low type (resp., low-type) at any time before and at
tLD —not just at time zero. Hence, our assumption imposed at the beginning of Section 5.2 that upon
choosing one of the offers, the responder is unable to switch to the other, can be relaxed without loss
of generality. This observation also suggests that the optimal menu of offers can be implemented as
a sign-up bonus contract (e.g., Porter et al. 2004, WorldatWork 2016). In particular, the responder
is free to choose when to accept an offer: If the responder accepts the offer before the shorter
deadline tLD , he will receive a sign-up bonus sL − sH on top of the regular offer size sH ; otherwise
if the responder accepts the offer before the regular deadline tH
D , he will receive the regular offer
size sH . Our analysis confirms that the low-type responder will take up the sign-up bonus at the
shorter deadline whereas the high-type responder continues to search until the regular deadline.
6. Conclusion
We investigate a scenario where a proposer makes an offer to a responder who is in search for alter-
native offers. In particular, we are interested in the proposer’s decision of offer size and associated
deadline with the offer, taking into account the responder’s responses to the offer.
In a situation where the proposer has full control of both offer size and duration, we demonstrate
that both an exploding offer and an offer with extended deadline could be optimal for the proposer
under different market conditions. In particular, when the market is unfavorable to the responder,
the proposer should adopt an aggressive strategy by making an exploding offer that exactly matches
the responder’s expected value of continuing searching at time zero; otherwise, the proposer should
offer below the responder’s value-to-go at time zero with a longer deadline. Moreover, in situations
where either deadline or offer size simply cannot be altered, we find that whereas the proposer’s
optimal deadline decreases with the given offer size, the optimal offer size is first decreasing then
increasing in the given deadline. Finally, we have extended our model to incorporate the proposer’s
uncertainty about the arrival rate of the responder’s alternative offers, and demonstrate that a
sign-up bonus type of offer is optimal for the proposer, where the low-type responder accepts the
offer before the shorter deadline and receives a sign-up bonus, whereas the high-type responder
searches until the regular deadline to receive the regular offer size.
Besides providing guidelines on how to include both size and duration in an offer issuance
decision, our findings have also contributed to the discussion on exploding offers vs. non-exploding
offers. Prior literature has mostly focused on the negative side of exploding offers for the matching
market, the offer responder, and even the offer proposer. For example, it has been found both
empirically (e.g., Roth and Xing 1994) and experimentally (e.g., Niederle and Roth 2009) that it
is difficult to form a thick market if firms are allowed to make exploding offers, leading to market
unravelling. Through behavioral experiments, Lau et al. (2014) also demonstrate the pitfalls of
offering exploding offers resulted from job applicants’ negative reciprocation towards the employer
after accepting such “unfriendly” job offers. However, this stream of literature has mostly discussed
the consequence of an exploding offer independent from other decisions of the offer proposer, such
as the offer size. Lippman and Mamer (2012) made the first attempt along this line to compare
exploding offers with permanent offers and suggest that in certain scenarios exploding offers can be
optimal for the offer proposer if the given offer size is large enough. Adding to this, we demonstrate
in our model that when both the offer size and duration are endogenized, an exploding offer can be
optimal to the proposer compared to non-exploding (and likely non-permanent) ones; in addition,
we also specify market conditions under which exploding offers are better.
Limitations and future work

Our work has several limitations that provide good venues for future research. First of all, our model
assumed that the alternative offers are independently and identically distributed. Admittedly, this
is an oversimplification for many situations in practice. For example, on the job market, whether a
job applicant might receive an offer from a particular employer might well depend on what other
offers he has already received. Future research that incorporates the dependence among alternative
offers will be able to provide additional insights into the impact of various other market conditions
on the proposer’s optimal strategy.
Moreover, our model is only focused on making one offer to one chosen responder. In practice,
especially in the recruitment setting, multiple responders—potentially differed in their utilities to
the proposer and the prospects of their alternative offer market—are evaluated around the same
time and the offers are often issued in a sequential fashion. Under this setting, given the same offer
size, one common practice is to rank the responders in the order of their utilities to the proposer,
and start with making the offer to the top responder. Whereas this is indeed optimal when all
offers are exploding, it may not longer be the case once we take into account the deadlines of the
offers. In particular, the problem becomes non-trivial since the top responder (in terms of utilities
to the proposer) may also have the longest shortest acceptable deadline, and hence there is a high
risk that the proposer gets no one within a limited period of time. Future research in the case of
one proposer making sequential offers to multiple responders should set out to jointly optimize not
only offer sizes and deadlines, but also to whom and in what orders to make offers.
Likewise, our analysis of the optimal menu of offers when the responder is restricted to one
of the two ex ante types naturally invites more research in the general case of continuous types
and general mechanisms. Armstrong and Zhou (2015) have explored a similar problem in the sales
context with a two-period model, where a buyer has a private utility to the seller’s product and
has the option to explore an outside alternative in between the two periods. They characterized the
optimal mechanism as a combination of buy-now discounts (similar to our sign-up bonus contract)
and an option contract. It would be interesting to see whether this more sophisticated mechanism
can be adapted to our context to generate more surplus for the proposer.
Finally, whereas we have captured the information symmetry between the proposer and the
responder with respect to the arrival rate of the responder’s alternative offers, modelling other
types of uncertainty should also reveal interesting insights. One interesting option is the responder’s
uncertainty about his alternative offer distribution, and the responder can update his belief through
the realized alternative offers over time (e.g., Kwon and Lippman 2011, Lippman and McCall 1976).
References
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Appendix. Proofs of the Main Results

Proof of Lemma 1. Rearranging (1) and letting δ → 0, we then have the following Hamilton-Jacobi-
Bellman (HJB) equations for any (s, tD ) such that when s ≥ v(tD )
0
V (t) = −λE[(X − V (t))+ ], if t ∈ [0, tD ) ∪ (tD , T ),
(18)
V (tD ) = s, V (T ) = 0,
where y + returns max(y, 0). And when s < v(tD ),
0
V (t) = −λE[(X − V (t))+ ], if t ∈ [0, T ),
(19)
V (T ) = 0.
We first consider the following differential equation on [0, T ], where T > 0 is an arbitrary termination time:
V (t) = −λE[(X − V (t))+ ],
( 0
(20)
V (T ) = s.
and establish the following result regarding to (20).
Lemma 8. Suppose X is a random variable with support [a, b], where 0 ≤ a ≤ b, b 6= 0 and consider (20).
If s ≥ b, then V (t) = s, for any t ∈ [0, T ]. If s < b, then V (t) < b for any t ∈ [0, T ] and V (t) satisfies
V (t) = T −1 T (s) + λ(T − t) .

Proof of Lemma 8. We first consider the case when s < b. To show that V (t) < b, we argue by contradic-
tion and suppose to the contrary that V (t) ≥ b for some t ∈ [0, T ]. Since V (T ) = s < b and V (t) is continuous
in t, there should exist some t ∈ [0, T ) where V (t) = b. We let τ = sup{t ∈ [0, T ) : V (t) = b}. By definition,
V (τ ) = b and V (t) < b for t ∈ (τ, T ].
Denote L(V (t)) = E[(X − V (t))+ ] ≥ 0. When t ∈ (τ, T ], from (20) we then have LdV (V )
= −λdt. Integrating
R V (T ) dv
on both sides, one has V (t) L(v) = −λ(T − t). Substituting V (T ) with the terminal condition and we have
Z V (t)
dv
= λ(T − t). (21)
s L(v)
R V (τ ) dv Rb
In particular, when t = τ , V (τ ) satisfies s L(v )
= s Ldv
(v )
= λ(T − τ ), which, however, is not possible to
hold. To see this, observe that L(v) = E[(X − v)+ ] ≤ (b − v)+ (in case X is unbounded, we can pick b to
Rb R b dv
be some large number that satisfies the inequality), which implies s Ldv(v )
≥ s b−v = +∞, a contradiction
to the assumption that V (t) ≥ b for some t ∈ [0, T ], and therefore we must have V (t) < b for any t ∈ [0, T ],
RV
in which case we have L(V (t)) > 0. Define T (V ) = 0 Ldv (v )
. Since L(V (t)) 6= 0, T (V (t)) is well-defined and
strictly increasing in V (t). Hence, from (21), we have
V (t) = T −1 T (s) + λ(T − t) .

Next we consider the case when s ≥ b. By V 0 (t) = −λE[(X − V (t))+ ] ≤ 0 for any t ∈ [0, T ], one must have
V (t) ≥ V (T ) = s ≥ b, implying that V 0 (t) = −λE[(X − V (t))+ ] = 0. Therefore, V (t) = s for any t ∈ [0, T ].
Let s = 0 and T = T , then (20) becomes (18) for t ∈ (tD , T ]. By Lemma 8 and T (0) = 0, we have
V (t) = T −1 (λ (T − t)), tD < t ≤ T,
and v(tD ) = T −1 (λ (T − tD )) < b.

Similarly, let T = tD , then (20) becomes (18) for t ∈ [0, tD ]. By Lemma 8, we have that if v(tD ) ≤ s < b,
V (t; s, tD ) = T −1 (T (s) + λ (tD − t));
and if s ≥ b, V (t; s, tD ) = s. This completes the proof.

Proof of Lemma 2. (i) From (18), V 0 (t) = −λE[(X − V (t))+ ] ≤ 0 for t ∈ [0, tD ) ∪ (tD , T ). In addition,
V (tD ) = s ≥ v(tD ). Hence, V (t) is decreasing in t.
(ii) Note that for any s ≥ 0, the constraint that s ≥ v(tD ) is equivalent as tD ≥ T − T (s)/λ and the feasible
set for tD is then [max{0, T − T (s)/λ}, T ]. In addition, it is sufficient to consider t ≤ tD , since V (t; s, tD ) is
independent of tD for the case of t > tD .
If s < b, by differentiating on both sides of T (V (t; s, tD )) = T (s) + λ(tD − t) in tD , we have
dT ∂V (t; s, tD )
= λ,
dV ∂tD
dT 1
and by dV
= L(V )
, one has
∂V (t; s, tD )
= λL(V (t; s, tD )) ≥ 0.
∂tD
That is, V (t; s, tD ) is increasing in tD for tD ≥ max{0, T − T (s)/λ}.
If s ≥ b, V (t; s, tD ) = s is independent of tD and our claim still holds.
(iii) For v(tD ) ≤ s < b, by differentiating on both sides of T (V (t; s, tD )) = T (s) + λ(tD − t) in s, we have
dT ∂V (t; s, tD ) dT (s)
= .
dV ∂s ds
dT 1
Since dV
= L(V )
, one has
∂V (t; s, tD ) L(V )
= ≥ 0.
∂s L(s)
For s ≥ b, V (t; s, tD ) = s is clearly increasing s. Hence, V (t; s, tD ) is increasing in s for s ≥ v(tD ). To see the
convexity of V (t; s, tD ), by L0 (V ) = −F̄ (V ), we have
∂ 2 V (t; s, tD ) L(V )(F̄ (s) − F̄ (V ))
= ,
∂s2 L(s)2
for v(tD ) ≤ s < b. By (i), V (t; s, tD ) ≥ V (tD ; s, tD ) = s for any t ≤ tD . As a result, F̄ (s) − F̄ (V ) ≥ 0 and
V (t; s, tD ) is convex in s for v(tD ) ≤ s < b. In addition, V (t; s, tD ) is clearly convex for s ≥ b. It is easy to check
that the left derivative of V (t; s, tD ) at s = b is L(V (t; b, tD ))/L(b) = L(b)/L(b) = 1 and the right derivative
at s = b is also 1. Hence, V (t; s, tD ) is differentiable in s at s = b and consequently V (t; s, tD ) is convex in s
for all s ≥ v(tD ).
L V (0;s,tD )
Proof of Proposition 1. From (6), we have Π(s, tD ) = (u − s) L(s)
. By Lemma 2 (ii), V (0; s, tD )
increases in tD . Hence, Π(s, tD ) decreases in tD . Therefore, under a fixed offer size s it is optimal to set the
+
deadline at tD (s) = (T − T (s)/λ) . Moreover, as T (s) increases in s, t∗D (s) decreases in s.
Proof of Lemma 3. Recall that v(tD ) = T −1 (λ(T − tD )), strictly decreasing in tD . Thus, when tD ∈ [0, t0 ),
by definition of t0 , we have v(tD ) > u. In this case, problem (9) is infeasible and it is optimal for the proposer
not to give an offer. On the other hand, when tD ∈ [t0 , T ], it must hold that v(tD ) ≤ u and hence there exists
a feasible solution to (9) with nonnegative payoff. As a result, the proposer is better off making an offer.
Proof of Theorem 1. To solve for the optimal offer size for a fixed tD ∈ [t0 , T ], it is equivalent to maximize

log Π(s, tD ) = log(u − s) + log L V (0; s, tD ) − log L s .
It follows that if s < b

∂ log Π(s, tD ) 1 F̄ (s) F̄ (V (0; s, tD )) 1 u − E[X|X ≥ s]
=− + − = F̄ (s) − F̄ (V (0; s, tD )) ,
∂s u−s L(s) L(s) L(s) u−s
∂V (0;s,tD ) L(V (0;s,tD ))

where we used ∂s
= L(s)
in the first equality and L(s) = (E[X|X ≥ s] − s) F̄ (s) in the second
equality. On the other hand, if s ≥ b, then V (0; s, tD ) = s. Therefore,
∂ log Π(s, tD ) 1
=− .
∂s u−s
We first show that whenever ŝ ≤ s ≤ u, ∂ log Π(s, tD )/∂s ≤ 0. Again we discuss the three cases with respect
to the value of u: u > b, x̄ ≤ u ≤ b, and u < x̄. First, when u > b, by the definition of ŝ in (10), we have
ŝ = b. Then for any b ≤ s ≤ u, ∂ log Π(s, tD )/∂s = −1/(u − s) ≤ 0. When x̄ ≤ u ≤ b, ŝ ≤ s ≤ u then implies
u − E[X|X ≥ s] ≤ 0 and hence ∂ log Π(s, tD )/∂s ≤ 0. Finally, when u < x̄, we have ŝ = 0 and for any 0 ≤ s ≤ u,
u−E[X|X ≥ s] ≤ u−E[X|X ≥ 0] = u− x̄ < 0, which makes ∂ log Π(s, tD )/∂s ≤ 0. Therefore, Π(s, tD ) decreases
in s for ŝ ≤ s ≤ u. Next, since v(tD ) strictly decreases in tD , by the definition of t, for any tD ∈ [t0 , t), v(tD ) > ŝ.
As a result, Π(s, tD ) decreases in s on [v(tD ), u], and we have s∗ (tD ) = v(tD ), which strictly decreases in tD .
By definition, s̃(tD ) maximizes Π(s, tD ) for any 0 ≤ s ≤ u. We next show that for any tD ∈ (t, T ], s̃(tD ) also
satisfies s ≥ v(tD ). Since V (0; s, tD ) increases in tD , ∂ log Π(s, tD )/∂s also increases in tD . That is, log Π(s, tD )
is supermodular in (s, tD ). By Theorem 2.8.3 in Topkis (2011), it then follows that s̃(tD ) is increasing in tD .
By the definition of t and the monotonicity of v(tD ) and s̃(tD ), we have s̃(tD ) > v(tD ) for any tD ∈ (t, T ].
That is, s̃(tD ) is also feasible to problem (9). Therefore, for any tD ∈ (t, T ], s̃(tD ) is the optimal solution to
problem (9), i.e., s∗ (tD ) = s̃(tD ). The monotonicity of s∗ (tD ) on [t, T ] then follows from that of s̃(tD ).
Finally, we will show that t ≤ t. We have shown that for tD ∈ [t0 , T ], whenever ŝ ≤ s ≤ u, Π(s, tD ) decreases
in s. Then by the definition of s̃(tD ), we must have s̃(tD ) ≤ ŝ. In addition, by the definition of t, for any
tD ∈ [t, T ], we have that v(tD ) ≤ s̃(tD ). Combining both inequalities, we then have that v(tD ) ≤ s̃(tD ) ≤ ŝ for
any tD ∈ [t, T ], which will only hold if t ≤ t. This completes the proof of the first part of Theorem 1.
For the second part, suppose that Π(s, tD ) is quasi-concave. For tD ∈ [t0 , t], it follows from the definition
of t that s̃(tD ) ≤ v(tD ). The quasi-concavity of Π(s, tD ) then implies that Π(s, tD ) is decreasing in s for any
s̃(tD ) ≤ s ≤ u. Therefore, s∗ (tD ) = v(tD ) for tD ∈ [t0 , t].
Proof of Proposition 2 We establish the quasi-concavity of Π(s, tD ) by showing that log Π(s, tD ) is con-
cave. Recall that for a fixed deadline tD , and s ≤ u

 − 1 + F̄ (s) − F̄ (V (0; s, tD )) ,

if s < b,
∂ log Π(s, tD )  u − s L(s)
=
∂s  1
−
 , if s ≥ b.
u−s
∂ log Π(s,tD )
Note that ∂s
is continuous at s = b, and is decreasing in s for s ≥ b. To show log Π(s, tD ) is concave
in s, it is sufficient to show that
F̄ (s) − F̄ (V (0; s, tD ))
g(s) :=
L(s)
is decreasing in s for s < b. Observe that
L(s) = E[(X − s)+ ] = E[X − s|X ≥ s]F̄ (s) = M(s)F̄ (s),
where M(s) := E[X − s|X ≥ s] is the mean residual life of X at s (see our definition in Section 4.2.2.). We
can then rewrite g(s) as
1 − F̄ (V (0; s, tD ))/F̄ (s)
g(s) = .
M(s)
Since X has decreasing hazard rate, the random variable [X − s|X ≥ s] is stochastically increasing (in the
usual stochastic order) in s (see Theorem 1 in Arnold and Lippman 2000 or Theorem 1.A.30. in Shaked and
Shanthikumar 2007). Hence, M(s) = E[X − s|X ≥ s] is increasing in s, i.e., X is IMRL (increasing mean
residual life). It follows that g(s) is decreasing in s if F̄ (V (0; s, tD ))/F̄ (s) is increasing in s. Indeed,
0
F̄ (V (0; s, tD )) −F̄ (s)f (V (0; s, tD ))L(V (0; s, tD ))/L(s) + f (s)F̄ (V (0; s, tD ))
=
F̄ (s) F̄ (s)2

F̄ (V (0; s, tD ))F̄ (s) f (s) f (V (0; s, tD ))
= L(s) − L(V (0; s, tD )) ≥ 0,
F̄ (s)2 L(s) F̄ (s) F̄ (V (0; s, tD ))
where the last inequality follows from the fact that f (·)/F̄ (·) and L(·) are both decreasing functions and
V (0; s, tD ) ≥ s.
Proof of Theorem 2. With t∗D (s) = (T − T (s)/λ)+ , note that T − T (s)/λ ≥ 0 if and only if s ≤ T −1 (λT ).
By (6), we have
log Π(s, t∗D (s)) = log(u − s) + log L V (0; s, t∗D (s)) − log L s .

If s > T −1 (λT ), then V (0; s, t∗D (s)) = V (0; s, 0) = s, and consequently
log Π(s, t∗D (s)) = log(u − s),
which is strictly decreasing in s. Hence, the optimal offer size must satisfy s ≤ T −1 (λT ). It follows that for
s ≤ T −1 (λT ), V (0; s, t∗D (s)) = T −1 (T (s) + λT − T (s)) = T −1 (λT ) which is independent of s, and we have
d log Π(s, t∗D (s)) 1 F̄ (s) u − E[X|X ≥ s] F̄ (s)
log Π(s, t∗D (s)) = log(u−s)+log L T −1 (λT ) −log L s , and

=− + = .
ds u − s L(s) u−s L(s)
We then consider the following two cases:
(a) When ŝ ≤ T −1 (λT ) (recall that T −1 (λT ) < b), by the definition of ŝ in (10), either ŝ = {s ∈ [0, u] |
E[X|X ≥ s] = u} or ŝ = 0. In the former case, log Π(s, t∗D (s)) is strictly increasing when 0 ≤ s ≤ ŝ and strictly
decreasing when ŝ ≤ s ≤ T −1 (λT ). Therefore, Π(s, t∗D (s)) is quasi-concave in s and the optimal offer size in
this case is simply ŝ. Similarly, in the latter case, log Π(s, t∗D (s)) is strictly decreasing on [0, T −1 (λT )], which
is still a quasi-concave function and s∗ = 0 = ŝ.
(b) On the other hand, when T −1 (λT ) < ŝ (recall that ŝ ≤ u), we have u − E[X|X ≥ s] > 0 for any
s ∈ [0, T −1 (λT )] and hence log Π(s, t∗D (s)) is strictly increasing when 0 ≤ s ≤ T −1 (λT ). Since log Π(s, t∗D (s)) =
log(u − s) is strictly decreasing in s for s > T −1 (λT ), Π(s, t∗D (s)) is quasi-concave in s and s∗ = T −1 (λT ).
Combining the two cases we then have s∗ = min {T −1 (λT ), ŝ} and t∗D = t∗D (s∗ ).
Proof of Corollary 1. From (3) and (10), we have that ŝ increases in u whereas T −1 (λT ) is constant
in u. Moreover, as shown in Lemma 1, 0 ≤ T −1 (λT ) = v(0) < b, whereas 0 ≤ ŝ ≤ b and ŝ = b for u > b
by definition. Therefore, there exists a finite constant u0 ≥ 0 such that when u < u0 , ŝ < T −1 (λT ), and
hence s∗ = min {T −1 (λT ), ŝ} = ŝ, whereas when u ≥ u0 , ŝ ≥ T −1 (λT ), and hence s∗ = min {T −1 (λT ), ŝ} =
T −1 (λT ). Similarly, T −1 (λT ) increases in λ whereas ŝ is constant in λ. In addition, 0 ≤ T −1 (λT ) < b whereas
0 ≤ ŝ ≤ b. Therefore, the same logic applies. Note, however, it is possible that T −1 (λT ) < ŝ for any λ ≥ 0
(say, when ŝ = b). In this case, we can let λ0 = ∞.
Proof of Lemma 4. First of all, M1 (s) ≤ M2 (s) implies x̄1 ≤ x̄2 and b1 ≤ b2 (by letting s = 0 or s = bi ).
Moreover, we say X1 is smaller than X2 in the increasing convex order, denoted as X1 ≤icx X2 , if E[φ(X1 )] ≤
E[φ(X2 )] for all increasing convex functions φ : R → R. By Theorem 4.A.26. in Shaked and Shanthikumar
(2007) if X1 ≤mrl X2 , then X1 ≤icx X2 . It follows that if X1 ≤mrl X2 , then E[(X1 − s)+ ] ≤ E[(X2 − s)+ ] for
any s ∈ R, and in addition, if x̄1 = x̄2 = x̄, then σ1 ≤ σ2 .
Proof of Theorem 3. (i) By the first part of Lemma 4, we have x̄1 ≤ x̄2 and b1 ≤ b2 . Since ŝ1 < T1−1 (λT ),
we must have u < b1 in this case (recall (10) otherwise ŝ1 = b1 > T1−1 (λT )). We next show that ŝ1 ≥ ŝ2 for
any 0 < u < b1 . If u < x̄2 , then recall (10) clearly we have ŝ2 = 0 ≤ ŝ1 . It is then sufficient to show that ŝ1 ≥ ŝ2
when x̄2 ≤ u < b1 (if x̄2 < b1 , otherwise we are done). In this case, ŝi is given by {s ∈ [0, bi ] | E[Xi | Xi ≥ s] = u}
for i = 1, 2. By the definition of X1 ≤mrl X2 , we have E[X1 | X1 ≥ s] ≤ E[X2 | X2 ≥ s]. Since E[Xi | Xi ≥ s] = u
is increasing in s, we then have ŝ1 ≥ ŝ2 .
On the other hand, by the second part of Lemma 4, we have L1 (V ) ≤ L2 (V ). It then follows that T1 (V ) ≥
T2 (V ) for any V ≥ 0. Since T1 (V ) and T2 (V ) both increase in V , we have T1−1 (λT ) ≤ T2−1 (λT ). Recall ŝ1 <
T1−1 (λT ), we then have that ŝ2 ≤ ŝ1 < T1−1 (λT ) ≤ T2−1 (λT ) and by Theorem 2, (s∗2 , t∗D,2 ) = (ŝ2 , T − T2 (ŝ2 )/λ).
From ŝ1 ≥ ŝ2 , we immediately have s∗1 ≥ s∗2 and by T1 (ŝ1 ) ≥ T1 (ŝ2 ) ≥ T2 (ŝ2 ), we have 0 < t∗D,1 ≤ t∗D,2 .
(ii) When (s∗2 , t∗D,2 ) = (T2−1 (λT ), 0), by Theorem 2, it implies that T2−1 (λT ) ≤ ŝ2 . From (i) above, we already
know that T1−1 (λT ) ≤ T2−1 (λT ). Hence, T1−1 (λT ) ≤ T2−1 (λT ) ≤ ŝ2 ≤ ŝ1 . As a result, (s∗1 , t∗D,1 ) = (T1−1 (λT ), 0),
with s∗1 = T1−1 (λT ) ≤ T2−1 (λT ) = s∗2 .
Proof of Corollary 2. We first present two lemmas that summarize the properties of T −1 (λT ; x̄, σ) and
ŝ(x̄, σ) with respect to x̄, for x̄ ∈ [σκ, +∞).
Lemma 9. For any given σ > 0, T −1 (λT ; x̄, σ) increases in x̄.
Proof of Lemma 9. For any given σ > 0, clearly L(v) = E[(x̄ + σ − v)+ ] is increasing in x̄. As a result,
T (v; x̄, σ) is decreasing in x̄, which then implies T −1 (λT ; x̄, σ) is increasing in x̄.
Lemma 10. Suppose has increasing hazard rate. For any given σ > 0, if x̄ < u − σκ, then ŝ(x̄, σ) increases
in x̄; if x̄ ≥ u − σκ, then ŝ(x̄, σ) decreases in x̄.
Proof of Lemma 10. When x̄ < u − σκ, by (10), ŝ = x̄ + σκ, which is increasing in x̄. In the following, we
focus on the case when x̄ ≥ u − σκ. To show the monotonicity of ŝ(x̄, σ) in x̄, consider two random variables
fX1 (x) fX2 (x)
X1 = x̄1 + σ and X2 = x̄1 + σ with x̄1 ≥ x̄2 . Let hX1 (x) = F̄X1 (x)
and hX2 (x) = F̄X2 (x)
be the hazard rate
function for X1 and X2 and let h0 (·) be the hazard rate function for . We then have for i = 1, 2
f x−σx̄i
1

fXi (x) σ 0 1 x − x̄i
hXi (x) = = = h0 .
F̄0 x−σx̄i

F̄Xi (x) σ σ
x−x̄1 x−x̄2
Clearly, x̄1 ≥ x̄2 implies that σ
≤ σ
. Since has increasing hazard rate, h0 (·) is increasing. Hence,
hX1 (x) ≤ hX2 (x), i.e., X1 ≥hr X2 . Note that hazard rate dominance implies mean residual life dominance,
i.e., X1 ≥hr X2 ⇒ X1 ≥mrl X2 . From the proof of Theorem 3, we can then conclude ŝ(x̄1 , σ) ≤ ŝ(x̄2 , σ).
−1
Note that when x̄ is sufficiently large, say, x̄ > u, then ŝ(x̄, σ) = 0 ≤ T (λT ; x̄, σ). Hence, x̄0 is well defined
with x̄0 ≥ σκ. In addition, we must have x̄0 > u − σκ. Otherwise, at x̄0 , we have T −1 (λT ; x̄, σ) ≥ ŝ(x̄, σ) =
x̄ + σκ = b, which contradicts with the fact that T −1 (λT ; x̄, σ) < b.
If x̄ ∈ [σκ, x̄0 ), then by definition of x̄0 , one must have T −1 (λT ; x̄, σ) < ŝ(x̄, σ). Hence, s∗ = T −1 (λT ; x̄, σ)
and by Lemma 9, it is increasing in x̄. On the other hand, if x̄ ∈ [x̄0 , +∞), then x̄0 > u − σκ. Since
T −1 (λT ; x̄, σ) is increasing in x̄ while ŝ(x̄, σ) is decreasing in x̄, we must have T −1 (λT ; x̄, σ) ≥ ŝ(x̄, σ). Thus,
s∗ = ŝ(x̄, σ), which is decreasing in x̄ by Lemma 10.
Proof of Proposition 3. We first present two lemmas that summarize the properties of T −1 (λT ; x̄, σ) and
ŝ(x̄, σ) with respect to σ, for σ ∈ (0, x̄/k].
Lemma 11. For any given x̄ > 0, if u ≤ x̄, then ŝ(x̄, σ) = 0, which is independent of σ. If u > x̄, define σ0 =
sup {σ ∈ (0, x̄/κ] | E [x̄ + σ| ≥ 0] ≤ u}. Then, ŝ(x̄, σ) ≥ x̄, for σ ∈ (0, σ0 ] and ŝ(x̄, σ) < x̄, for σ ∈ (σ0 , x̄/κ]. In
addition, ŝ(x̄, σ) is decreasing in σ for σ ∈ (σ0 , x̄/κ].
Proof of Lemma 11. If u ≤ x̄, then ŝ(x̄, σ) = 0 follows directly from (10).
If u > x̄, note that for 0 < σ < (u − x̄)/κ, one has u > x̄ + σκ = b and hence
E[x̄ + σ| ≥ 0] = E[x̄ + σ|x̄ + σ ≥ x̄] ≤ E[x̄ + σ|x̄ + σ ≥ x̄ + σκ] = x̄ + σκ < u.
It follows that σ0 is well-defined and σ0 ≥ min{(u − x̄)/κ, x̄/κ}. In addition, since E[x̄ + σ| ≥ 0] is clearly
increasing in σ, from the definition of σ0 , it follows that for σ ∈ (0, σ0 ], E[x̄+σ|x̄+σ ≥ x̄] ≤ E[x̄+σ0 | ≥ 0] ≤
u. By (10), it must hold that ŝ(x̄, σ) ≥ x̄. Similarly, for σ ∈ (σ0 , x̄/κ], one must have E[x̄ + σ|x̄ + σ ≥ x̄] > u,
and hence ŝ(x̄, σ) < x̄.
Finally, when σ ∈ (σ0 , x̄/κ], ŝ(x̄, σ) is the unique solution to
E[x̄ + σ| ≥ (s − x̄)/σ] = u, 0 ≤ s < x̄.
In the following, we show that E[x̄ + σ| ≥ (s − x̄)/σ] = x̄ + σE[| ≥ (s − x̄)/σ] is increasing in σ when s < x̄.
Indeed, let g(σ) = σE[| ≥ (s − x̄)/σ], it can be computed that
dg(σ)
= E[| ≥ z] − zh0 (z)E[ − z| ≥ z],
dσ
where z = (s − x̄)/σ < 0 for s < x̄ and h0 (z) = f0 (z)/F̄0 (z) is the hazard rate function of . For z < 0,
dg (σ )
E[| ≥ z] ≥ E[| ≥ −κ] = 0. We then have dσ
≥ 0 and hence ŝ(x̄, σ) decreases in σ when σ ∈ (σ0 , x̄/κ].
Lemma 12. For any given x̄ > 0, define σ1 = sup {σ ∈ (0, x̄/κ] | T (x̄; x̄, σ) ≥ λT }. Then, T −1 (λT ; x̄, σ) ≤ x̄
for σ ∈ (0, σ1 ], and T −1 (λT ; x̄, σ) > x̄ for σ ∈ (σ1 , x̄/κ]. In addition, T −1 (λT ; x̄, σ) increases in σ.
v−x̄
Proof of Lemma 12. Let z = σ
, then we have
Z κ Z κ
+
L(v; x̄, σ) = E[(x̄ + σ − v) ] = (x̄ − v + σ) f0 () d = σ( − z)f0 () d = σL0 (z),
v−x̄
σ
z
where L0 (z) = E[( − z)+ ]. It follows that

Z κ Z κ Z κ
dL(v; x̄, σ) dL0 (z) dz
=σ + L0 (z) = z f0 () d + ( − z)f0 () d = f0 () d.
dσ dz dσ z z z
Rκ Rκ Rκ
The integral z f0 () d is clearly nonnegative when z ≥ 0. When z < 0, we have z f0 () d ≥ −κ f0 () d =
0. Therefore, L(v; x̄, σ) increases in σ for σ ∈ [0, x̄/κ], and hence
Z x̄
dv
T (x̄; x̄, σ) = ,
0 L(v; x̄, σ)
is decreasing in σ. Note that Z x̄

dv
T (x̄; x̄, 0) =
= +∞ > λT.
0 x̄ −v
As a result, σ1 > 0 and for any 0 ≤ σ ≤ σ1 , T (x̄; x̄, σ) ≥ λT . Since T (0; x̄, σ) = 0 and T (v; x̄, σ) is strictly
increasing in v, it follows that T −1 (λT ; x̄, σ) ≤ x̄ for σ ∈ [0, σ1 ]. Similarly, if σ1 < x̄/κ, then (σ1 , x̄/κ] is
nonempty and for any σ ∈ (σ1 , x̄/κ], one has T (x̄; x̄, σ) < λT , which implies T −1 (λT ; x̄, σ) > x̄.
To show T −1 (λT ; x̄, σ) increases in σ, consider σ, σ 0 ∈ [0, x̄/κ] with σ ≤ σ 0 . Suppose T (V ; x̄, σ) = λT for
some V ∈ [0, x̄/κ] (i.e., V = T −1 (λT ; x̄, σ)). Since T (V ; x̄, σ) ≥ T (V ; x̄, σ 0 ), and T (v; x̄, σ 0 ) is strictly increasing
in v, we then have T −1 (λT ; x̄, σ 0 ) ≥ T −1 (λT ; x̄, σ).
When (i) u ≤ x̄, by Lemma 11, ŝ(x̄, σ) = 0. Therefore, by Theorem 2, s∗ = min {T −1 (λT ; x̄, σ), ŝ(x̄, σ)} =
+
ŝ(x̄, σ) with the corresponding deadline t∗D = (T − T (0)/λ) = T .
When (ii) u > x̄, if σ ≤ min{σ0 , σ1 }, by definitions of σ0 , σ1 and Lemmas 12 and 11, T −1 (λT ; x̄, σ) ≤ x̄ and
ŝ(x̄, σ) ≥ x̄. Consequently, s∗ = T −1 (λT ; x̄, σ), which is increasing in σ by Lemma 12. On the other hand, if
σ > max{σ0 , σ1 }, then T −1 (λT ; x̄, σ) > x̄ and ŝ(x̄, σ) < x̄. It follows that s∗ = ŝ(x̄, σ), which is decreasing in σ
+ R ŝ
for σ ∈ (max{σ0 , σ1 }, x̄/κ] by Lemma 11. Moreover in this case, t∗D = (T − T (ŝ)) , where T (ŝ) = 0 L(vdv ;x̄,σ )
.
We have already shown that L(v; x̄, σ) increases in σ for σ ∈ [0, x̄/κ] and that ŝ is decreasing in σ for σ ∈
(max{σ0 , σ1 }, x̄/κ]. Therefore, T (ŝ) decreases in σ for σ ∈ (max{σ0 , σ1 }, x̄/κ] and consequently t∗D increases
in σ for σ ∈ (max{σ0 , σ1 }, x̄/κ].
Proof of Lemma 5. By Lemma 2 (ii), both VH (t; s, tD ) and VL (t; s, tD ) are increasing in tD . From (13),
both exp(−mH (0, tD )) and exp(−mL (0, tD )) are then decreasing in tD , and we know that the optimal deadline
given an offer size s is either tH L
D (s) or tD (s).
The proposer’s objective function under either tH L

D (s) or tD (s) can be derived by plugging in accord-
+
ingly tiD (s) = (T − T (s)/λi ) , i = H, L, and (13), with corresponding expected surpluses Π(s, tH
D (s)) and
Π(s, tL
D (s)):
(
H
u−s
pL(T −1 (λH T )) + (1 − p)L(VL (0; s, tH
D (s))) , 0 ≤ s < T −1 (λH T ),
Π(s, t (s)) =
D
L(s)
u − s, T −1 (λH T ) ≤ s ≤ u,
and ( −1
L (1 − p)(u − s) L(T (λL T ))
, 0 ≤ s < T −1 (λL T ),
Π(s, t (s)) =
D
L(s)
(1 − p)(u − s), T −1 (λL T ) ≤ s ≤ u.
Proof of Proposition 4. Recall the expression of Π(s, tH L
D (s)) and Π(s, tD (s)) derived in the proof Lemma 5,
and define
Π(s, tH L
D (s)) − Π(s, tD (s))
∆(λL ) := .
u−s
We consider the following three cases with respect to the value of s.
(a) When T −1 (λH T ) ≤ s ≤ u, Π(s, tH L ∗ H
D (s)) = u−s ≥ (1−p)(u−s) = Π(s, tD (s)), and therefore tD (s) = tD (s).

(b) When T −1 (λL T ) ≤ s < T −1 (λH T ), Π(s, tH u−s H
D (s)) = L(s) (1 − p)L(VL (0; s, tD (s))) + pL(T
−1
(λH T ))
∗
whereas Π(s, tL H
D (s)) = (1 − p)(u − s). Therefore, tD (s) = tD (s) if and only if
−1
(1 − p)L(VL (0; s, tH
D (s))) + pL(T (λH T ))
∆(λL ) = − (1 − p) ≥ 0,
L(s)
−1 −1
where ∆(λL ) is decreasing in λL since VL (0; s, tH
D (s)) = T (T (s) + λL tH
D (s)) = T (T (s) + λL (T − T (s)/λH ))
pL(T −1 (λH T ))
is increasing in λL . Moreover, when λL = 0, ∆(λL ) = L(s)
≥ 0.

(c) When 0 ≤ s < T −1 (λL T ), Π(s, tH
D (s)) =
u−s
L(s)
(1 − p)L(VL (0; s, tH
D (s))) + pL(T
−1
(λH T )) whereas
L L(T −1 (λL T )) ∗ H
Π(s, t (s)) = (1 − p)(u − s)
D L(s)
. Therefore, t (s) = t (s) if and only if
D D

−1
(1 − p) L(VL (0; s, tH
D (s))) − L(T (λL T )) + pL(T −1 (λH T ))
∆(λL ) = ≥ 0,
L(s)
where ∆(λL ) increases in λL . To see this, let g(λL ) = T (s) + λL (T − T (s)/λH ) and recall that VL (0; s, tH
D (s)) =
T −1 (T (s) + λL tH
D (s)) = T
−1
(T (s) + λL (T − T (s)/λH )) = T −1 (g(λL )), then

−1
d L(VL (0; s, tHD (s))) − L(T (λ L T )) ∂L(T −1 (g(λL ))) dT −1 (g(λL )) ∂L(T −1 (λL T )) dT −1 (λL T )
= 1
· (T − T (s)/λH ) − ·T
dλL −
∂T (g(λL )) dg(λL ) ∂T −1 (λL T ) dλL T
= −F̄ T −1 (g(λL )) L T −1 (g(λL )) (T − T (s)/λH ) + F̄ T −1 (λL T ) L T −1 (λL T ) T.

Since g(λL ) > λL T , we have T −1 (g(λL )) > T −1 (λL T ), leading to F̄ (T −1 (g(λL ))) < F̄ (T −1 (λL T )) and
d∆(λL )
L (T −1 (g(λL ))) < L (T −1 (λL T )). We then have that dλL
> 0. Moreover, we have limλL →λH ∆(λL ) ≥ 0.
Summarizing case (b) and (c) for when λH > T (s)/T , we have that ∆(λL ) decreases in λL for 0 ≤ λL ≤
T (s)/T and increases in λL for T (s)/T < λL < λH ; in addition, ∆(0) ≥ 0 and limλL →λH ∆(λL ) ≥ 0. By letting
λL = sup {λL ∈ (0, T (s)/T ] |∆(λL ) ≥ 0 } and λL = inf {λL ∈ [T (s)/T, λH ) |∆(λL ) ≥ 0 } ,
we have ∆(λL ) ≥ 0 and t∗D (s) = tH ∗ L

D (s) if λL ≤ λL or λL ≥ λL , and ∆(λL ) < 0 and tD (s) = tD (s) if λL ∈ (λL , λL ).
Further summarizing case (a) for when λH ≤ T (s)/T , this concludes the proof.
Proof of Lemma 6. Under the strategy of catering only to the low type, the optimal offer size is the same
as in the case where there is no uncertainty as depicted in Theorem 2. On the other hand, under the strategy
of catering to both types, define s∗H (λL ) as the smallest solution to the following problem
max log Π(s, tH
D (s))
s.t. 0 ≤ s ≤ T −1 (λH T ).
−1
Since Π(s, tH
D (s)) is strictly decreasing in s for s ≥ T (λH T ), we can restrict our attention to s∗H (λL ). Note
that the constraint set [0, T −1 (λH T )] is independent of both s and λL , and hence if log Π(s, tH
D (s); λL ) is super-
modular in (s, λL ), then s∗H (λL ) is increasing in λL . Next, we show that log Π(s, tH
D (s); λL ) is supermodular
in (s, λL ) on [0, T −1 (λH T )] × [0, λH ). Recall that

H p H −1
log Π(s, t (s); λL ) = log(1 − p) + log(u − s) − log L(s) + log L(VL (0; s, t (s))) +
D DL(T (λH T )) .
1−p
Hence,
∂ log Π(s, tH
D (s); λL ) −F̄ (VL (0; s, tH H H
D (s)))tD (s)L(VL (0; s, tD (s))) F̄ (VL (0; s, tH H
D (s)))tD (s)
= p =− p .
∂λL L(VL (0; s, tH
D (s))) + 1−p L(T
−1 (λ T ))
H 1 + 1−p L(T −1 (λH T ))/L(VL (0; s, tH
D (s)))
Since F̄ (VL (0; s, tH H H

D (s))), L(VL (0; s, tD (s))), and tD (s) are all nonnegative and decreasing in s, we know that
∂ log Π(s, tH H
D (s); λL )/∂λL increases in s, i.e., log Π(s, tD (s); λL ) is supermodular.
Proof of Proposition 5. It is sufficient to show that
Π(s∗H (0), tH ∗ ∗ L ∗
D (sH (0)); 0) > Π(sL (0), tD (sL (0)); 0), and lim Π(s∗H (λL ), tH ∗ ∗ L ∗
D (sH (λL ))) > lim Π(sL (λL ), tD (sL (λL ))).
λL →λH λL →λH
∗
Recall the expressions of Π(s, tL H
D (s)) and Π(s, tD (s)) in Lemma 5, and sL (λL ) in Lemma 6. First note that
when λL = 0, s∗L (0) = 0 and hence
Π(s∗L (0), tL ∗
D (sL (0)); 0) = (1 − p)u.
Moreover, s = 0 is always a feasible solution to max0≤s≤u Π(s, tHD (s); 0), resulting in an expected surplus
L(T −1 (λH T ))

H
Π(0, tD (0); 0) = u p + (1 − p) > (1 − p)u.
L(0)
Therefore, we have that
Π(s∗H (0), tH ∗ H ∗ L ∗
D (sH (0)); 0) ≥ Π(0, tD (0); 0) > Π(sL (0), tD (sL (0)); 0).
On the other hand, when λL → λH , T −1 (λL T ) → T −1 (λH T ), and for s < T −1 (λH T ) we have that

−1 −1
lim VL (0; s, tH
D (s)) = lim T T (s) + λ t
L D
H
(s) = T T (s) + λ t
H D
H
(s) = T −1 (λH T ).
As a result, ( −1
H (u − s) L(T (λH T ))
, s ∈ [0, T −1 (λH T )),
lim Π(s, t (s)) =
D
L(s)
λL →λH u − s, s ∈ [T −1 (λH T ), u],
which is strictly greater than limλL →λH Π(s, tL
D (s)) for any s ∈ [0, u]. Therefore, we have that
lim Π(s∗H (λL ), tH ∗ ∗ L ∗

D (sH (λL ))) > lim Π(sL (λL ), tD (sL (λL ))).
Proof of Lemma 7. From the IC constraints in (15) for the high-type responder, we have that
−1 −1

VH (0; sH , tH L
D ) ≥ VH (0; sL , tD ) ⇐⇒ T T (sH ) + λH tH
D ≥T T (sL ) + λH tL L H
D ⇐⇒ T (sH ) − T (sL ) ≥ λH (tD − tD ).
Similarly, for the low-type responder, we have that
−1 −1

VL (0; sL , tL H
D ) ≥ VL (0; sH , tD ) ⇐⇒ T T (sL ) + λL tL
D ≥T T (sH ) + λL tH L H
D ⇐⇒ λL (tD − tD ) ≥ T (sH ) − T (sL ).
Moreover, if tL H L H L H
D > tD , then we would have that λH (tD − tD ) > λL (tD − tD ) ≥ T (sH ) − T (sL ), which violates
the IC constraint for the high-type responder. Hence, we must have that tL H L H
D ≤ tD and by 0 ≥ λL (tD − tD ) ≥
T (sH ) − T (sL ), we have that sL ≥ sH .

Proof of Proposition 6. Consider any feasible solution, (sH , tH L
D ) and (sL , tD ), that satisfies both IR and
IC constraints prescribed in problem (15). Lemma 7 then implies that sH ≤ sL , tH L

D ≥ tD . In the following we
show that one can always construct a solution

H H L H L
(f
sH , tf
D ) = min{sH , vH (0)}, tD (sH ) , (f
sL , tf
D ) = min{sL , VL (0; s
fH , tD )}, tD (f
f sH , sL ) ,
that achieves a higher expected surplus for the proposer, satisfies (16a), and is feasible. We first show that
the proposer’s expected surplus,
L(VH (0; sH , tH
D )) L(VL (0; sL , tL
D ))
pH (u − sH ) + pL (u − sL ) ,
L(sH ) L(sL )
H L H L
is higher under the menu of offers, (f
sH , tf
D ) and (f
sL , tf
D ), than under (sH , tD ) and (sL , tD ), and that the
former menu of offers satisfies (16a). We distinguish between two cases below.
(a) If sH ≤ vH (0), then sf

H = sH and T − T (sH )/λH ≥ 0. We clearly have that
H
H
tf sH )/λH = tH
D = tD (sH ) = T − T (sH )/λH = T − T (f D (f
sH )
H
and that 0 ≤ sfH ≤ vH (0), satisfying (16a). Since (sH , tD ) satisfies the IR constraint for the high type, we
have that tH ≥ tH (sH ) = tf

D D
H
; also recall that L(VH (0; sH , tH )) is decreasing in tH . Hence, the expected surplus
D D D
obtained from the high type satisfies

L(VH (0; sf H
H , tD ))
f L(VH (0; sH , tH
D (sH ))) L(VH (0; sH , tH
D ))
(u − sf
H) = (u − sH ) ≥ (u − sH ) .
L(fsH ) L(sH ) L(sH )
That is, one can always improve the expected surplus obtained from the high type by keeping the offer size
H
unchanged, i.e., sf
H = sH and shrinking the deadline from t
H
to tf = tH (sH ).
D D D
H L
We further show that, on top of (fsH , tf
D ), (f
sL , tf
D ) also satisfies (16a) and leads to a higher expected surplus
obtained from the low type than (sL , tL D ). If (i) sL ≤ VL (0; s f H

H , tD ), then s
f fL = sL and T (f
H
D −
sH )/λL + tf
H
T (sL )/λL ≥ 0. From sH ≤ sL , we have that sf H ≤s fL ≤ VL (0; s
fH , t ). In addition,
f
D
L T (f
sH ) f T (sL ) T (f
sH ) f T (f
sL )
L
D = tD (f
tf sH , sL ) = + tH
D − = + tH
D − = tL
D (f
sH , sf
L ),
λL λL λL λL
satisfying (16a). Since (sL , tL
D ) satisfies the IC constraint for the low-type responder, by Lemma 7, we have
that λL (tL H
D − tD ) ≥ T (sH ) − T (sL ), or equivalently,
T (sH ) T (sL ) T (f
sH ) f T (f
sL ) f
tL
D ≥ + tH
D − ≥ + tH
D − = tL
D,
λL λL λL λL
where the second inequality comes from the IR constraint for the high type, i.e., tH H H
D ≥ tD (sH ) = tD . Since
f
L(VL (0; sL , tL L
D )) is decreasing in tD , the proposer’s relevant expected surplus from the low type satisfies
L(VL (0; sf L
L , tD ))
f L
L(VL (0; sL , tf
D )) L(VL (0; sL , tL
D ))
(u − sf
L) = (u − sL ) ≥ (u − sL ) .
L(fsL ) L(sL ) L(sL )
In this case, the expected surplus is improved by keeping the offer size unchanged, i.e., sf
L = sL , and shrinking
L L H H
the deadline from t to t . If, on the other hand, (ii) sL > VL (0; sf H , t ), then sL = VL (0; sH, t ) ≥ sH and
f f f
D D f D f f D
H
T (f D − T (sL )/λL < 0. In this case we have that
sH )/λL + tf
L T (f
sH ) f T (f
sL )
L
D = tD (f
tf sH , sL ) = 0 = + tH
D − = tL
D (f
sH , sf
L ),
λL λL
L L
D = 0 ≤ tD . The proposer’s relevant surplus from the low type then satisfies
satisfying (16a), and clearly tf
L(VL (0; sf L
L , tD ))
f L(VL (0; sL , tL
D ))
(u − sf
L) = u − sf
L ≥ u − sL ≥ (u − sL ) ,
L(fsL ) L(sL )
where the first equality is due to VL (0; sf
L , 0) = s
fL . In this case, the surplus is improved by first shrinking the
L L H
deadline from t to t = 0 and then reducing the offer size from sL to sf
D
f
D L = VL (0; s
fH , t ).
f
D
H = vH (0), T − T (sH )/λH < 0. In this case,

(b) If sH > vH (0), then sf
H
H
tf sH )/λH = tH
D = tD (sH ) = 0 = T − T (f D (f
sH ),
satisfying (16a). Hence, the proposer’s relevant expected surplus from the high type satisfies
L(VH (0; sf H
H , tD ))
f L(VH (0; sH , tH
D ))
(u − sf
H) = u − sf
H ≥ u − sH ≥ (u − sH ) ,
L(fsH ) L(sH )
where the equality is due to VH (0; sf

H , 0) = sf H . Moreover, for the low-type responder we have that
+
L L T (f
sH ) T (sL )
tD = tD (f
f sH , sL ) = − = 0,
λL λL
H
H = vH (0) < sH ≤ sL . In addition, since VL (0; s
where the last equality is due to sf H , tD ) = VL (0; s H , 0) = s H <
f f f f
H H L
sL , we have that sf
L = min{sL , VL (0; s
fH , tD )} = VL (0; s
f fH , tD ) = s
f fH , and consequently, (f sL , tD ) = (f
f sH , 0) =
sH , tL
(f D (f
sH , sf
L )), which satisfies (16a). The proposer’s relevant expected surplus from the low type satisfies
L(VL (0; sf L
L , tD ))
f L(VL (0; sL , tL
D ))
(u − sf
L) = u − sf
L =u−sH ≥ u − sL ≥ (u − sL ) ,
L(f L(sL )
f
sL )
where the first equality is due to VL (0; sf
L , 0) = s
fL and the first inequality from s
fH < sH ≤ sL . Therefore,
when sH > vH (0), the proposer’s expected surplus can be improved by first shrinking the deadlines, tH
D and
tL
D , to 0 and then reducing the offer sizes, sH and sL , to vH (0); in other words, it is better for both type of
responders to get the same offer: (vH (0), 0).

Next, we remark that conditions (16a) and (16b) are equivalent, since
H −1 H L H −1 H L
H = vH (tD ) = T
sf (λH (T − tf
D )), sf
L = VL (tD ; sH , tD ) = T (T (f D − tD )).
sH ) + λL (tf
f f f f f
Finally, we show that the constructed solution, which is already shown to satisfy (16a), is feasible, i.e., it
satisfies both IR and IC constraints in problem (15). From (16b), the IR constraint is clearly satisfied for
L H
the high type; as for the low type, we have from (16b) that sf
L = VL (t ; s
f fH , t ), and the corresponding IR
f
D D
L
constraint, sfL ≥ vL (tD ), can be rewritten as
f

L H L −1 H L −1 L H
VL (tf
D; sH , tD ) ≥ vL (tD ) ⇐⇒ T T (f D − tD ) ≥ T
sH ) + λL (tf λL (T − tf
D ) ⇐⇒ tD ≥ T − T (f
sH )/λL ,
f f f f f
H L H
which holds since tf D = T − T (f sH )/λH ≥ T − T (f D − tD ) =
sH )/λL . Moreover, from (16a) we have that λL (tf f
L H
T (f
sH ) − T (f
sL ) ≥ λH (tf
D − tf ), and hence by Lemma 7 the IC constraints for both types are satisfied.
D
Proof of Corollary 3. With the aforementioned two binding constraints, respectively, tH H

D = tD (sH ) and
tL L H H
D = tD (sH , sL ), we first simplify the objective function of (15). With tD = tD (sH ) = T − T (sH )/λH , we have

−1 −1
VH (0; sH , tH
D) = T T (sH ) + λH tH
D (sH ) = T (T (sH ) + λH (T − T (sH )/λH )) = T −1 (λH T ),
and with tL L H
D = tD (sH , sL ) = tD (sH ) − (T (sL ) − T (sH ))/λL , we have that

−1 −1
VL (0; sL , tL
D) = T (T (sL ) + λL tL
D (sH , sL )) = T T (sL ) + λL tHD (sH ) − (T (sL ) − T (sH ))/λL

= T −1 T (sH ) + λL tH D (sH ) = VL (0; sH , tH
D (sH )).
The objective function in (15) is then simplified by replacing VH (0; sH , tH L

D ) and VL (0; sL , tD ). We then add the
constraints from Proposition 6 that at optimality, 0 ≤ sH ≤ vH (0) = T −1 (λH T ) and sH ≤ sL ≤ VL (0; sH , tH

D ),

−1 H −1
where the latter is further simplified to sH ≤ sL ≤ T T (sH ) + λL tD (sH ) = T (λL TL (sH )).
Proof of Theorem 4. We sequentially solve problem (17) by first solving for the optimal s∗L (sH ) for a
given sH , and then optimizing over sH . For a given sH , the problem of finding the optimal sL is simplified to
L(T −1 (λL TL (sH )))
max pL (u − sL )
sL L(sL )
−1
s.t. sH ≤ sL ≤ T (λL TL (sH )) .
Take logarithm of the objective function, and the above problem is equivalent to
max log(u − sL ) − log(L(sL ))
sL
(22)
s.t. sH ≤ sL ≤ T −1 (λL TL (sH )) .
The derivative of the objective function in (22) yields:
1 F̄ (sL ) u − E[X|X ≥ sL ] F̄ (sL )
− + = ,
u − sL L(sL ) u − sL L(sL )
that is, the objective function is increasing for sL < ŝ and decreasing for sL ≥ ŝ. As a result of this and the
constraint that sH ≤ sL ≤ T −1 (λL TL (sH )), the optimal solution for (22) can be written as
min{T −1 (λL TL (sH )) , ŝ}, if sH < ŝ,
(
∗
sL (sH ) =
sH , if sH ≥ ŝ.
Now we turn to the problem of optimizing over sH . From the constraint in problem (17), we have
that s∗H ≤ T −1 (λH T ). Moreover, if (i) ŝ ≥ T −1 (λH T ), then s∗H ≤ T −1 (λH T ) ≤ ŝ, and our claim that s∗H ≤
min{T −1 (λH T ), ŝ} = T −1 (λH T ) holds. In the following we focus on the case when (ii) ŝ < T −1 (λH T ) and
we show that s∗H < ŝ. First of all, observe that for any sH ≥ ŝ, s∗L (sH ) = sH . As a result, when sH ≥ ŝ the
objective function in problem (17) can be simplified as
L(T −1 (λH T )) L(T −1 (λL TL (sH )))
pH (u − sH ) + pL (u − sH ) , (23)
L(sH ) L(sH )
to be optimized over sH . We next show that the objective function in (23) is strictly decreasing in sH when
sH ≥ ŝ. Again take logarithm of (23), and we have that
log(u − sH ) − log(L(sH )) + log pH L(T −1 (λH T )) + pL L(T −1 (λL TL (sH ))) .

(24)
Since TL (sH ) = T (sH )/λL + tH

D (sH ) = T + T (sH )(1/λL − 1/λH ) increases in sH , the last item in (24) decreases
in sH , and the derivative of (24) is bounded above by

1 F̄ (sH ) u − E[X|X ≥ sH ] F̄ (sH )
− + = ≤0
u − sH L(sH ) u − sH L(sH )
for sH ≥ ŝ. Hence, (24) is strictly decreasing in sH when sH ≥ ŝ, which implies that s∗H < ŝ. Therefore,
regardless of whether (i) ŝ ≥ T −1 (λH T ) or (ii) ŝ < T −1 (λH T ), we have that s∗H ≤ min{T −1 (λH T ), ŝ}.
Moreover, since s∗H ≤ T −1 (λH T ) always holds, we discuss the following two cases to further characterize
the optimal solution:

(a) If s∗H = T −1 (λH T ), then tH ∗
D (sH ) = 0 and T
−1
(λL TL (s∗H )) = T −1 T (s∗H ) + λL tH ∗ ∗
D (sH ) = sH . Clearly, in
this case s∗L = s∗H (which is the only feasible solution in (22)) and tL∗ H∗
D = tD = 0.
(b) If s∗H < T −1 (λH T ), recalling that s∗H < ŝ always holds, from the expression of s∗L (sH ), we directly have
s∗L = min{T −1 (λL TL (s∗H )) , ŝ} > s∗H .
To see this, note that s∗H < ŝ and that

T (s∗H )

s∗H < T −1 (λL TL (s∗H )) ⇐⇒ T (s∗H ) < λL + tH
D (s∗
H ) = T (s∗H ) + tH ∗
D (sH ),
λL
∗ ∗ −1
the latter always holds since tH
D (sH ) > 0 when sH < T (λH T ). Correspondingly, we have that
+
T (s∗H ) T (s∗L )

L∗ L ∗ ∗ H ∗ ∗
tD = tD (sH , sL ) = + tD (sH ) − > tH H∗
D (sH ) = tD .
λL λL
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Size Matters, So Does Duration: The Interplay Between Offer Size and Offer Deadline

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Preprint · April 2019

Zhenyu Hu Wenjie Tang

SEE PROFILE SEE PROFILE

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3.1. Model Setup

Proposer makes an offer Alternative offer X arrives

Figure 1 Timeline of decisions and alternative offers’ arrival process

3.2. The Responder’s Problem

V (t) = λδE[max (X, V (t + δ))] + (1 − λδ)V (t + δ) + o(δ), t ∈ [0, tD ) ∪ (tD , T ). (1)

In both cases, v(tD ) = T −1 (λ(T − tD )) < b.

The function T in Lemma 1 can be interpreted as a value-to-time operator. More specifically, if

Lemma 2. The responder’s value-to-go V (t; s, tD ) has the following properties:

4. The Proposer’s Problem

4.1. Optimal Decision for Exogenous Offer Size or Deadline

where tD (s) is defined in (4). Moreover, t∗D (s) is decreasing in s.

Proposition 2. If X has decreasing hazard rate, then Π(s, tD ) is quasi-concave in s.

− log(1 − x̄/u)/λ, x̄ ≤ u(1 − e−λT ),

which is quasi-concave in s. Its stationary point s0 (tD ) satisfies9

4.2. Joint Optimization of Offer Size and Deadline

s∗ = min T −1 (λT ), ŝ , and t∗D = t∗D (s∗ ),

x̄e−λT , s < v(0),

which is quasi-concave in s, and the optimal solution is:

s∗ = x̄(1 − e−λT ), t∗D = 0.

Theorem 3. Consider two alternative offers X1 and X2 with X1 ≤mrl X2 . We have:

< = 0:7; u = 3; 6 = 2; T = 2 < = 0:7; u = 3; 6 = 2; T = 2

Figure 4 Changes of optimal offer size s∗ and t∗D with respect to x̄

Proposition 3. Define σ0 = sup {σ ∈ (0, x̄/κ] | E [x̄ + σ| ≥ 0] ≤ u} and σ1 =

Figure 5 Changes of optimal offer size s∗ and t∗D with respect to σ

5. Uncertain Types of Responder

L(VH (0; s, tD )) L(VL (0; s, tD ))

5.1. Single Offer

tD < tLD (s),

The proposer’s problem can now be written as

We then investigate the comparison between Π(s, tH L

5.2. Menu of Offers

Lemma 7. The incentive compatibility constraints in (15) are equivalent to

which requires that sH ≤ sL and tH L

For a given pair of (tH

compatible with the high-type offer (tH

proposer’s expected surplus by shortening the deadlines tH L

L(T −1 (λH T )) L(T −1 (λL TL (sH )))

7 = 2:5; 6L = 1; 6H = 3; T = 2; (tLD ; sL ) = (1:3; 4); (tH

Value of continuing searching: V (t)

(a) A feasible menu of offers: (tH

Theorem 4. Let (s∗H , tH∗ ∗ L∗

responder, respectively. We have that

s∗H ≤ min{T −1 (λH T ), ŝ} and tH∗ H ∗

s∗L = min{T −1 (λL TL (s∗H )) , ŝ} and tL∗ L ∗ ∗

moreover, we have that s∗L > s∗H and tD

Finally, we note from the proof of Lemma 7 that IC constraints, VH (0; sH , tH L

and VL (0; sL , tLD ) ≥ VL (0; sH , tH L

Limitations and future work

Ballmer, Steven A. 2008. Microsoft’s letter to the yahoo board. https://www.theguardian.com/business/

Topkis, Donald M. 2011. Supermodularity and Complementarity. Princeton University, Springer.

WorldatWork. 2016. Bonus programs and practices. https://www.worldatwork.org/adimLink?id=80398.

Appendix. Proofs of the Main Results

V (t) = T −1 T (s) + λ(T − t) .

V (t) = T −1 T (s) + λ(T − t) .

V (t) = T −1 (λ (T − t)), tD < t ≤ T,

and v(tD ) = T −1 (λ (T − tD )) < b.

V (t; s, tD ) = T −1 (T (s) + λ (tD − t));

and if s ≥ b, V (t; s, tD ) = s. This completes the proof.

Proposition 3. Define σ0 = sup {σ ∈ (0, x̄/κ] | E [x̄ + σ| ≥ 0] ≤ u} and σ1 =

E[x̄ + σ| ≥ 0] = E[x̄ + σ|x̄ + σ ≥ x̄] ≤ E[x̄ + σ|x̄ + σ ≥ x̄ + σκ] = x̄ + σκ < u.

E[x̄ + σ| ≥ (s − x̄)/σ] = u, 0 ≤ s < x̄.

where L0 (z) = E[( − z)+ ]. It follows that