Sunk Cost as a Self-Management Device
42 Pages Posted: 26 Aug 2016 Last revised: 30 Nov 2017
Date Written: November 28, 2017
The sunk cost effect has been widely observed in individual decisions. Building on an intra-personal self-management game, the paper theoretically shows that the sunk cost effect may stem from an attempt to overcome the under-investment problem associated with a high degree of present bias or to resolve the multi-selves coordination problem when the degree of present bias is low. Especially for individuals with severe present bias, the current self may take a costly action (which is a sunk cost for the future self) to signal the individual's high ability that motivates his future self-disciplining behaviors. In equilibrium, a higher level of sunk cost is more likely to give rise to a higher probability for the individual to continue the project. We then conduct a laboratory experiment. The empirical findings are consistent with our theoretical implications.
Keywords: Sunk Cost, Limited Memory, Present Bias, Signaling, Coordination
JEL Classification: C91, D03, D83, Z13
Suggested Citation: Suggested Citation