Sunk Cost as a Self-Disciplining Device

Fuhai Hong and Xiaojian Zhao
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Fuhai Hong: Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, 14 Nanyang Drive, Singapore 637332

No 1503, Economic Growth Centre Working Paper Series from Nanyang Technological University, School of Social Sciences, Economic Growth Centre

Abstract: Building on an intra-personal self-signaling game, the paper pro- vides an economic model to show that the sunk cost effect may stem from an attempt to overcome the under-investment problem associ- ated with present bias. The current self may take a costly action (which is a sunk cost for the future self) to signal the individual's ability that motivates his future self-disciplining behaviors. In equi- librium, a higher level of sunk cost gives rise to a higher probability for the individual to continue the project.

Keywords: Present bias; signaling; sunk cost fallacy; limited memory. (search for similar items in EconPapers)
JEL-codes: D03 D83 Z13 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2014-11
New Economics Papers: this item is included in nep-cbe, nep-mic and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:nan:wpaper:1503

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