Irreversibility , Sunk Costs , “ News ” and Evolutionary Economic Methodology

An enlarged conceptual framework for redefining sunk costs as state dependent evaluations is proposed by highlighting how unforeseen contingencies impact systemic adjustment processes through the interplay between existing and prospective irreversibilities. Associated microeconomic mechanisms define market entry and exit, and thereby capture key channels by which history conditions the evolution of economic systems and the interrelation between market and non-market decisions. A crucial distinction is made between ex ante sunk costs, which are contingent on agents’ initial information spaces, and ex post or endogenous sunk cost evaluations, following agents’ internalization of news and strategic interactions. Paradoxically, such redefined sunk costs can have quite divergent implications for the decisions of individual agents and for the evolution of economic systems, as a whole, through their critical role as buildingblocks, which define strategic interactions and adjustment processes. An examination of the relation between the hold-up and lock-in problems highlights the role of information revelation in defining the endogeneity of sunk cost evaluations. A subsequent extension of Owen and Ulph (2002) focuses on the systemic impact of an unanticipated integration shock, hence “pure news”, on endogenous market entry and exit in a framework of international oligopoly. A central identification issue in economic modeling is suggested, which applies to scenarios with market imperfections and strategic interdependence between agents, as shown by a unique correspondence between alternative trade regimes and configurations of different sunk and fixed costs. Asymmetries between the choice sets and optimization problems of agents are defined by existing and newly incurred endogenous sunk costs. A range of generic implications is suggested. These include a defining role for endogenous sunk costs in explaining theories of commitment, micro-foundations of learning processes and expectations formation, new branches in game-theoretic decision trees and the economics of time. JEL classification codes: B4, D8, F1, L1