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Performance Feedback Does Not Eliminate the Sunk-Cost Fallacy: Evidence From Professional Football

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  • Quinn Keefer

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    Empirical studies on the influence of sunk costs in high stakes decisions have come to mixed conclusions. As observational studies have primarily used professional sports labor markets, we analyze the effect of sunk costs, player compensation, on the labor utilization of defensive players in the National Football League (NFL). Our analysis has several advantages. First, we measure the direct impact of increased financial commitment. Second, we analyze the effect of sunk costs when firms have accurate and abundant performance feedback; therefore, our conclusions are not driven by uncertainty. Finally, we control for possible endogeneity by using the exogenous variation in compensation generated when players become eligible for free agency or change teams. Our results indicate sunk costs are significant determinants of player utilization. A 15 % increase in compensation has an equivalent effect on playing time as an increase of five to eleven solo tackles, one to two interceptions and two to five and a half sacks in the previous season for linebackers, defensive backs and defensive linemen respectively. Furthermore, the sunk-cost fallacy is persistent throughout the entire career of an average NFL player. Copyright Springer Science+Business Media New York 2015

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    File URL: http://hdl.handle.net/10.1007/s12122-015-9215-y
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    Article provided by Springer in its journal Journal of Labor Research.

    Volume (Year): 36 (2015)
    Issue (Month): 4 (December)
    Pages: 409-426

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    Handle: RePEc:spr:jlabre:v:36:y:2015:i:4:p:409-426
    DOI: 10.1007/s12122-015-9215-y
    Contact details of provider: Web page: http://www.springer.com

    Order Information: Web: http://www.springer.com/economics/journal/12122

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    1. Anthony C. Krautmann & Peter von Allmen & David Berri, 2009. "The Underpayment of Restricted Players in North American Sports Leagues," International Journal of Sport Finance, Fitness Information Technology, vol. 4(3), pages 161-175, August.
    2. Daniel Leeds & Michael A. Leeds & Akira Motomura, 2013. "Are Sunk Costs Irrelevant? Evidence from Playing Time in the National Basketball Association," DETU Working Papers 1304, Department of Economics, Temple University.
    3. Borland, Jeff & Lee, Leng & Macdonald, Robert D., 2011. "Escalation effects and the player draft in the AFL," Labour Economics, Elsevier, vol. 18(3), pages 371-380, June.
    4. Rob Simmons & David Berri, 2009. "Gains from Specialization and Free Agency: The Story from the Gridiron," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(1), pages 81-98, February.
    5. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    6. Lawrence M. Kahn, 2000. "The Sports Business as a Labor Market Laboratory," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 75-94, Summer.
    7. A. Colin Cameron & Pravin K. Trivedi, 2010. "Microeconometrics Using Stata, Revised Edition," Stata Press books, StataCorp LP, number musr, September.
    8. Arkes, Hal R. & Blumer, Catherine, 1985. "The psychology of sunk cost," Organizational Behavior and Human Decision Processes, Elsevier, vol. 35(1), pages 124-140, February.
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