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

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

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

  • Anil Arya & Hans Frimor & Brian Mittendorf, 2004. "Pouring Money Down the Drain? How Sunk Investments and Signing Bonuses can Improve Employee Incentives," Yale School of Management Working Papers ysm412, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm412
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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