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 |
DOIs | |
Publication status | Published - May 2019 |
Keywords
- Coordination
- Limited memory
- Present bias
- Signaling
- Sunk cost