TAX COMPETITION, POLICY COMPETITION AND THE STRATEGIC USE OF POLICY RESTRICTIONS ON FOREIGN DIRECT INVESTMENTS

In a dynamic two-period model of tax competition, where competing countries strategically choose foreign investment restrictions which increases the sunk cost of investments, we show that choosing a higher level of restriction is beneficial for the competing countries. A higher level of restriction reduces competition and increases tax revenue in the later period, which allows the government to offer large tax holidays during the initial period of investment. The result is counter-intuitive as it is widely believed that sunk cost reduces foreign direct investments. Moreover, even though competing countries are ex-ante symmetric, the equilibrium choice of the level of restrictions may not be equal.

How Venture Team Recommendations Influence Undue Entrepreneurial Persistence: The Impact of Self-Regulation and Experience

Persisting with a losing project (i.e., a new product development project facing superior competition) is a social endeavor that can increase the costs of failure to the entrepreneur and other stakeholders. Yet, it tends to be explained almost exclusively in terms of intrapersonal predictors, such as the sunk cost fallacy. This paper examines whether, how, and under which conditions interpersonal influence, such as the intensity of a team’s recommendation to persist with a losing project, encourages entrepreneurs to persist. Drawing from the psychologies of escalation and self-regulation, we build a model of entrepreneurs’ undue persistence that we test through experimental design and conjoint analysis. We find that an entrepreneur’s decision to persist with a losing project is determined partly by the team’s recommendation to persist and that the strength of this effect varies across entrepreneurs based on their self-regulation and experience.

Sunk cost sensitivity in mice, rats, and humans on the Restaurant Row and WebSurf tasks cannot be explained by attrition biases alone

In a recent bioRxiv preprint, Ott et al. argue that sensitivities to sunk costs that have been reported in two serial foraging tasks (the Restaurant Row task in mice and rats, and the Web-Surf task in humans) may be due to simple consequences of the way that subjects perform these tasks and not due to an actual sensitivity to sunk costs. However, several variants of these tasks have been studied, in which the sensitivity to sunk costs changes. In order to test the Ott et al. model against these experimental observations, we simulated the model under these additional experimental conditions. We find that it is incompatible with the actual data. While we applaud the simplicity of the Ott et al. model, we must reject it as an explanation for the observed sensitivity to sunk costs seen in these tasks. We thus conclude that the alternative explanation - that mice, rats, and humans are sensitive to actual sunk costs in these tasks - is a better explanation for the data.

The Sunk Cost and the Real Option Pricing Model

Although the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which can estimate the value of real options more accurately. First, we explore the distinctive features that distinguish real options from financial options. The study shows that the distinguishing feature of the real options is the sunk cost, which does not exist in the financial options. Based on the sunk cost characteristic of real options, we find that the exercise conditions of real and financial options are different. Second, we introduce the sunk cost into the intrinsic value function of real options and establish a new real option pricing model. Finally, this paper also discusses the properties of the intrinsic value function and pricing model of real options. We find that the application of the Black–Scholes option pricing model will overestimate the value of real options.

Escalation of Commitment: Supporting Role from Accountants

Previous research has mostly examined the phenomenon of escalation of commitment in the context of decision making by managers in an investment project. However, in the capital budgeting process, before making investment decisions managers tend to consider information produced by accountants. This study examines the phenomenon of escalation of commitment using the perspective of supporting role of accountants as the party that provides information for investment decision making by managers, especially in the presence of sunk costs. This study uses a laboratory experimental method. The sample in this study are 156 undergraduate students majoring in Accounting who had passed Financial Accounting and Management Accounting courses. Based on the results of the independent sample t-test, it shows that accountants who experienced sunk cost conditions tend to provide reports that directed managers towards escalation of commitment behavior compared to accountants who do not experience sunk cost conditions. The presence of sunk cost makes accountants have better mind frame to get the possibility of profit compared with a definite loss so that the decisions they make tend to provide reports that lead to the escalation of commitment behavior.