Abstract
The sunk cost effect has been widely observed in individual decisions. Building on an intrapersonal self-management game, the paper theoretically shows that the sunk cost effect may stem from an attempt to overcome the underinvestment 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 success probability 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.
Original language | English |
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Pages (from-to) | 2216-2230 |
Number of pages | 15 |
Journal | Management Science |
Volume | 65 |
Issue number | 5 |
Early online date | 1 Aug 2018 |
DOIs | |
Publication status | Published - May 2019 |
Funding
W. Huang was supported by a start-up grant from Wuhan University. X. Zhao was supported by the Hong Kong University of Science and Technology Institute for Emerging Market Studies [Grant IEMS17BM01].
Keywords
- sunk cost
- limited memory
- present bias
- signaling
- coordination
- Signaling
- Sunk cost
- Coordination
- Present bias
- Limited memory