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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol, Emmanuelle / Brunner, Johann / Fleck, Robert / Mastrobuoni, Giovanni / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year

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Volume 3, Issue 1


Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

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

Anil Arya / Hans Frimor / Brian Mittendorf
Published Online: 2003-06-13 | DOI: https://doi.org/10.2202/1538-0653.1138


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.

Keywords: sunk investments; incentives; hold-up problem

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Published Online: 2003-06-13

Citation Information: Topics in Economic Analysis & Policy, Volume 3, Issue 1, ISSN (Online) 1538-0653, DOI: https://doi.org/10.2202/1538-0653.1138.

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