Incurring Sunk Costs to Alleviate a Hold-up Problem

Anil Arya (), Hans Frimor () and Brian Mittendorf ()
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Hans Frimor: University of Southern Denmark, Faculty of Social Sciences, Department of Accounting and Finance
Brian Mittendorf: Yale University, School of Management

Yale School of Management Working Papers from Yale School of Management

Abstract: Though sunk costs impact future income calculations (via depreciation for example), accountants are reminded that their sunk nature makes them irrelevant for future decisions. An explanation for why firms routinely incur such costs is that technology considerations make them inescapable. This paper shows that sometimes firms may prefer to make early (less-informed) investment decisions even when such decisions can be delayed. Sunk costs commit and clarify a firm's future course of action to prospective employees, thereby providing them with incentives to acquire firm-specific human capital.

Date: 2002-11-25
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