Context
In Chapter 5 of Managerial Economics, Froeb discussed
post-investment holdup as a sunk cost problem associated with
contract-specific fixed investments. The modern theory of contracts is
sometimes called the theory of joining wills, which simply means when
parties make an agreement they are joining together to complete an
endeavor of mutual interest. The problem with all contracts that endure
over time is that not all potential challenges can be anticipated. The
idea of joining wills is that parties will attempt to seek
accommodations to advance their mutual interest, so long as the return
on the invested activity pays off. Froeb illustrates the idea by the
example of marriage as a contract (1).
Sources
Luke M. Froeb. 2018. Managerial Economics: A Problem Solving Approach (5th ed.). p. 59. Cengage.
Instructions
Review the three scenarios below. Look for which, if any, of these scenarios presents an example of post-investment holdup.
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.
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.
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?
