Incurring Sunk Costs to Alleviate a Hold-up Problem

Though sunk costs impact future income calculations (via depreciation for example), accountants are reminded that their sunk nature makes them irrelevant for future decisions. An explanation for why firms routinely incur such 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 such decisions can 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.