Pouring Money Down the Drain? How Sunk Investments and Signing Bonuses can Improve Employee Incentives

Anil Arya (), Hans Frimor () and Brian Mittendorf ()
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Anil Arya: Ohio State University, Fisher College of Business
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: common explanation for why firms incur sunk 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 technology allows such decisions to 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. This benefit of sunk costs may also provide justification for offering employee signing bonuses.

JEL-codes: G31 J33 (search for similar items in EconPapers)
Date: 2004-07-28
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