Together on the path to construction innovation: yet another example of escalation of commitment?

Abstract

Collaborative innovation projects are projects in which firms join forces to cooperate in the development and commercialization of a new building product, system, or service. They represent an example of the type of inter-firm relationships that are said to enhance construction innovation. Organizational behaviour research, however, suggests that firms participating in such innovation projects run the risk of escalating commitment and may continue to invest for irrational reasons. It is therefore relevant to examine whether Dutch firms that invest, in collaboration with other firms, in the development and commercialization of a new building product, system, or service are susceptible to this escalation. Two escalation effects were investigated: the effect of expected loss of sunk costs, and the effect of perceived project stage. A survey was undertaken of 154 firms participating in 25 collaborative innovation projects. The results suggest that firms in the population under study are unlikely to fall victim to either of the two escalation effects. Rather, the negative association found between the expected loss of sunk costs and likelihood of continuing investment raises the question as to whether firms become more cautious when they have spent a lot.

Value of Investors’ Escalation of Commitment in PPP Projects Using Real Option Thinking

“…As these subjective psychological characteristics of private investors are typically stable, mainly affecting their dissonant cognition (see below for details), the analysis of w k only addresses objective factors. With the escalation decision point as the dividing point, the determinants consist of three categories, including the past sunk cost level c k (Chung & Cheng, 2018;Rutten et al, 2014;Staw & Ross, 1987;Westfall et al, 2012), the current evidentiary weight a k and the future government guarantee degree G (Wang & Liu, 2015;Wang et al, 2018). Specifically, representing the effect of past factors on decision-making, the value of k c is equal to the ratio of all sunk cost utility to the expected full input utility, and 0 k c > ; the value of G equals the absolute value of the ratio of government guarantees to the actual profits and 0,1 G ∈     .…”

Identifying Project Factors That Affect an Investor’s Escalation of Commitment in Public-Private Partnership Projects

“…The greater the cost and the degree of completion, the greater the willingness to invest will be and the more serious the EOC (Garland, 1990). However, Rutten et al (2014) found that in collaborative projects of an innovative nature, the sunk cost and the degree of completion cannot contribute to the EOC; instead, there are negative influences due to other factors. High or low responsibility placed on individuals and the element of uncertainty can have a negative effect on the articulation of decision-making targets for a PPP project (Bazerman, Giuliano, & Appelman, 1984; Khavul et al, 2011).…”

“…This theory largely reflects the competitive relationship between loss and profit; thus, a reasonable reference point is important to decision makers. Some studies have discussed the effect of sunk costs (money) on EOC (shown in Table 1), but studies that consider the time cost of the project are even more scarce (Rutten, Dorée, & Halman, 2014). In the framework of agency theory, there is serious information asymmetry between the agent and the client.…”

“…PPP projects usually have higher costs, complex technology, and longer concession periods (Song, Song, Zhang, & Sun, 2013). The influence of sunk costs on EOC can be greater according to prospect theory (Rutten et al, 2014). In a PPP project, as the initiator of the project, the government has the right to control the future market of the PPP.…”

“…Therefore, it is significant to explore the comprehensive effects of these project factors on the EOC and the difference in the strength of the effects. There has been mature research on EOC in the areas of accounting and financial management (Liu & Tang, 2007a), engineering-related industries (Rutten et al, 2014), management information systems (Khan et al, 2014; Mallampalli & Karahanna, 2017; Park & Berente, 2012), and entrepreneurship programs (Ren & Wang, 2006). Related research remains rare, but there are serious instances of EOC in PPP projects.…”