Question

Review the three scenarios below. Look for which, if any, of these scenarios presents an example of post-investment holdup.

1. Your firm conducted a search for a new chief financial officer and hired a highly qualified candidate with a yearly salary of $250,000. After six months, the person left to join another firm.
2. Your firm has an exclusive contract to assemble automobile seats for a number of luxury models. Almost 100% of the materials are imported and, of those, over 50% include parts manufactured in China. All of the prices on the parts from China increased by 25% when the U.S. imposed tariffs on China. Your company has informed all of its customers that increased cost must be passed on for your firm to continue supplying the seats. All of your customers reluctantly agreed to pay the additional cost.
3. Your company took note of your progress toward your MBA, and when the director for customer services left the company, you were asked to take over as interim director. You were encouraged to apply for the full-time position once you got your MBA. You served for 13 months, at which time your company was acquired by another company and your position was abolished.

In your discussion post, address the following:

• Introduce yourself to your peers by sharing something unique about your background. Explain how you expect this course will help you move forward in your current or future career.
• Which of the above, if any, are an example of post-investment holdup?
• Define the following and explain each within the context of a chosen scenario:
  • What is the sunk, or stranded, cost?
  • What is the contract?
  • Was the contract breached?
  • What are the damages?

Answer 1

Post investment hold up is the problem that arises when the contract is not written properly and leads to incomplete contract.

In the given examples, the example of post investment hold up is scenario 3 where there is breaching of contract because it could not be written properly.

The sunk costs are the costs which have already been incurred and it is difficult and mostly impossible to recover such costs. The sunk cost in this scenario is the cost of pursuing MBA that the person had to incur. This cost cannot be recovered.

The contract in the given scenario was to give the individual the position of director of customers service for full time after the individual has pursued MBA.

Yes, the contract was breached because the position of the individual was abolished even after he had fulfilled the condition of pursuing MBA for getting that position.

The breaching of the contract led to damage both to the individual and to the company. The individual had lost a high position because if breaching of contract and the company's performance would also have been affected by removing a deserving person and hard working person from the position.