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

Author

Listed:
  • Arya Anil

    (Ohio State University)

  • Frimor Hans

    (University of Southern Denmark)

  • Mittendorf Brian

    (Yale University)

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.

Suggested Citation

  • Arya Anil & Frimor Hans & Mittendorf Brian, 2003. "Pouring Money Down the Drain? How Sunk Investments and Signing Bonuses can Improve Employee Incentives," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-14, June.
    • Handle: RePEc:bpj:bejeap:v:topics.3:y:2003:i:1:n:6
    DOI: 10.2202/1538-0653.1138
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    Cited by:

    1. Matthew Ellman, 2006. "Specificity Revisited: The Role of Cross-Investments," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(1), pages 234-257, April.
    2. Yang, Fanzheng, 2013. "Using laboratory experiments to study otherwise unobservable labor market interactions," ISU General Staff Papers 201301010800004100, Iowa State University, Department of Economics.

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