Sunk cost of local elected representatives in situation of fiscal competition: An example of escalating commitment

Introduction

Competition between French local communities to build infrastructures to attract enterprises and residents could sometimes result in irrational public spending.

Objectives

Show the influence of psychological factors and the phenomenon of escalating commitment in particular on this type of economic decision.

Method

We conducted a survey comprising four scenarios which were sent to 285 local elected representatives and we study the impact of the factors “Amount of sunk costs” and “Level of project completion” on two dependent variables, “the desire to complete the project” and “the judgment regarding the quality of the investment”. The scenarios presented a project which involve servicing a site and the construction of a road infrastructure in order to attract an enterprise.

Results

In conformity with the works of Boehne and Paese, whatever the dependent variable, the level of project completion significantly explains the escalation of commitment. The hypothesis of “sunk costs” is confirmed when the escalation of commitment is measured by the dependent variable “desire to complete the project”.

Conclusion

We have highlighted the effect of sunk costs and level of project completion on the decisions of local elected representatives, enriching the understanding of economic decision factors.