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Incurring Sunk Costs to Alleviate a Hold-up Problem

Author

Listed:
  • 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)

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.

Suggested Citation

  • Anil Arya & Hans Frimor & Brian Mittendorf, 2002. "Incurring Sunk Costs to Alleviate a Hold-up Problem," Yale School of Management Working Papers ysm319, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm319
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