Question

Instructions

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 Holdup

The holdup problems is central to the theory of incomplete contact. It shows the problem arises in a written contract will end up in underinvestment.

When one party has made a prior commitment to a relationship with another party, the latter can ‘hold up’ the former for the value of that commitment. It is argued that the possibility of hold-up can lead to underinvestment in relationship-specific investments and hence to inefficiency.

"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." This is a perfect example for Post-Investment Holdup. Here your firm has created a contract and firm can't perform there activities perfectly.

Sunk cost or stranded cost means the cost have already occurred and have zero chance to recover in future. Hiring an employee with a yearly salary of $250,000 and employee left after 6 month is an example for sunk cost. The yearly salary payed to employee is non-recoverable.

Contact in simple definition is a promise enforced by law. Contact is a written agreement between 2 parties which are legally binding. Both parties should have to perform a certain activities inorder archive mutual benefits. A company send an job agreement letter is an example for contact.

Breach of contract is occure when on party is violation any of the terms and conditions of the written contract. If any party can achieve promised activities is an contact breach. When you working for a company and that company terminate your job contract is an example for breach of contract