Replication Package: Sunk Cost Effect, Self-control, and Contract Design

Principal Investigator(s):  View help for Principal Investigator(s) Xing Zhang, Sungkyunkwan University; Ganesh Iyer, University of California-Berkeley; Xiaoyan Xu, Southwestern University of Finance and Economics; Juinkuan Chong, National University of Singapore

Version:  View help for Version V1

Name File Type Size Last Modified
Gym.qsf text/plain 30 KB 07/15/2023 11:12:PM
Gym_20220214_Relabel.csv text/csv 57.2 KB 07/15/2023 11:18:PM
README.txt text/plain 641 bytes 02/14/2022 05:02:PM
Replication_Codes_and_Results.Rmd text/plain 3.3 KB 07/15/2023 11:48:PM
Replication_Codes_and_Results.html text/html 640.4 KB 07/15/2023 11:35:PM

Project Citation: 

Zhang, Xing, Iyer, Ganesh, Xu, Xiaoyan, and Chong, Juinkuan. Replication Package: Sunk Cost Effect, Self-control, and Contract Design. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2023-07-16. https://doi.org/10.3886/E192762V1

Project Description

Summary:  View help for Summary This paper examines the role of the sunk cost effect as a commitment device in mitigating the self-control problem and analyzes its implications for optimal contract design. Consumers may anticipate the effect ex-ante, and strategically use it to mitigate their self-control problems. While the sunk cost effect may lead to a loss of consumption flexibility in the event of high consumption costs, it can serve as a commitment device to enforce self-control. A firm's optimal policy should balance the consumer's demand for flexibility in consumption with the demand for commitment. Under a simple fixed-fee contract sunk costs have a non-monotonic effect on profits for investment goods: i.e., profits first decrease and then increase with the sunk cost effect. The firm can use a two-part tariff or a refundable fixed-fee contract to mitigate the sunk cost effect. The paper also compares the implications of alternative psychological mechanisms underlying the sunk cost effect (regret-based vs. memory-cue-based) for contract design.



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V1 [2023-07-16]

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