Project Escalation and the Sunk Costs: A Test of the International Generalizability of Agency and Prospect Theories

Abstract

North American research suggests that agency (specifically, asymmetric information and incentive to shirk) and prospect theories may explain project escalation decisions. We explored the generalizability of these theories in this context. The willingness of managers from North America (U.S. and Canada) and Asia (Hong Kong and Singapore) to escalate losing projects was measured using four go/no go decision cases. Based on the individualist-collectivist culture dimension, we hypothesized that Asian managers were less willing to act in their self-interest (a lower agency effect), and based on Confucian values of saving face, that Asian managers were more willing to escalate a decision in the presence of negative framing (a stronger framing effect). We found that agency had strong explanatory power for project escalation decisions in North America, but none in our Asian sample. Framing effects were significant in both North America and Asia, but were not significantly different between the two groups.

JEL Classification: D81, D82, C91