Tuesday, February 17, 2009

Sunk Costs, Automakers, and the Escalation of Commitment

As GM and Chrysler made their requests for billions more in assistance, policymakers will have to be very wary of getting caught in a dangerous and very expensive escalation of commitment. With such high sunk costs in this situation, the risk will be that federal officials will not want to ever "waste" the prior investments that they have made to help the auto industry. Thus, they may continue to gradually escalate their commitment. The risk, of course, is that the federal government may find itself throwing good money after bad.