Sunk Cost as a Self-Management Device

The sunk cost effect has been widely observed in individual decisions. Building on an intra-personal self-signaling game, the paper provides an economic model to show that the sunk cost effect may stem from an attempt to overcome the under-investment problem associated with present bias. The current self may take a costly action (which is a sunk cost for the future self) to signal the individual's ability that motivates his future self-disciplining behaviors. In equilibrium, a higher level of sunk cost gives rise to a higher probability for the individual to continue the project. We then conduct a laboratory experiment, which supports our theoretical implications.