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 developm ent outcomes associated with the resource extraction sector. Their role is explored here by: (1) developing analytical models that show specifically h ow sunk costs influence investment behavior and outcomes; and (2) consideri ng the historical experience during major epochs of two important extractiv e industries. The models demonstrate how sunk costs, in conjunction with un certainty or strategic behavior can severely distort efficiency and equity outcomes. The Amazon rubber boom and bust and the pan-American aluminum ind ustry illustrate the significance of sunk costs in the extractive sector an d beyond.