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Sunk Cost as a Self-Disciplining Device

Author

Listed:
  • Fuhai HONG

    (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, 14 Nanyang Drive, Singapore 637332)

  • Xiaojian ZHAO

    (Department of Economics, Hong Kong University of Science and Technology, Hong Kong)

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.

Suggested Citation

  • Fuhai HONG & Xiaojian ZHAO, 2014. "Sunk Cost as a Self-Disciplining Device," Economic Growth Centre Working Paper Series 1503, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    • Handle: RePEc:nan:wpaper:1503
    as

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    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2015/2015-03.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Mario Ferrero, 2016. "Jesus and the Ratchet," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 33(1), pages 173-195, August.

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    More about this item

    Keywords

    Present bias; signaling; sunk cost fallacy; limited memory.;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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