Sunk costs and the natural resource extraction sector: Analytical models and historical examples of hysteresis and strategic behavior in the Americas

Sunk costs play a significant role in shaping industry conduct and development outcomes associated with the resource extraction sector. Their role is explored here by: (1) developing analytical models that show specifically how sunk costs influence investment behavior and outcomes; and (2) considering the historical experience during major epochs of two important extractive industries. The models demonstrate how sunk costs, in conjunction with uncertainty or strategic behavior can severely distort efficiency and equity outcomes. The Amazon rubber boom and bust and the pan-American aluminum industry illustrate the significance of sunk costs in the extractive sector and beyond.