A BEJEAP Topics article.

Abstract

A 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.

Submitted: March 17, 2003 · Accepted: May 22, 2003 · Published: June 13, 2003

Originally published in Topics in Economic Analysis & Policy.

Recommended Citation

Arya, Anil; Frimor, Hans; and Mittendorf, Brian (2003) "Pouring Money Down the Drain? How Sunk Investments and Signing Bonuses can Improve Employee Incentives," Topics in Economic Analysis & Policy: Vol. 3 : Iss. 1, Article 6.
Available at: http://www.bepress.com/bejeap/topics/vol3/iss1/art6