Sunk Cost Effect, Self-Control, and Contract Design.

This article investigates the sunk cost effect as a commitment device that can mitigate consumers' self-control problems and explores its implications for optimal contract design, particularly in markets for investment goods such as health clubs and online education. It models consumers exhibiting present bias (time inconsistency) and regret-based sunk cost disutility, showing that the sunk cost effect can both reduce consumption flexibility and serve as a commitment mechanism to increase consumption, leading to a nonmonotonic relationship between sunk cost magnitude and optimal fixed fees and firm profits. The analysis compares fixed-fee, pay-per-use, and two-part tariff contracts, finding that fixed-fee contracts can be more profitable than pay-per-use contracts when marginal costs are low and self-control problems are moderate, but the sunk cost effect generally reduces profits under two-part tariffs and refundable contracts. Additionally, the article contrasts regret-based and memory-cue-based psychological mechanisms underlying the sunk cost effect, demonstrating that only the latter allows firms to achieve first-best profits with appropriate contract designs. A pilot study confirms that consumers anticipate the sunk cost effect ex ante and may strategically use it to enhance future engagement.