Week 1 Discussion

Post Investment Hold Up

What Turns a Sunk Cost Into Post Investment Holdup?  Here is some help.

Holdup Problem, Airline Edition

In chapter 5 Froeb discussed post-investment holdup as 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.

Which of the following, if any, are an example of post investment holdup?  In your answer explain: what is the sunk, or stranded cost; what is the contract; was the contract breached; and what are the damages.

a) Your firm conducted a search for a new Chief of Finance and hired a highly qualified candidate with a yearly salary of $250,000.  After six months after taking the job the person left to join another firm.

b) 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 US imposed tariffs on China. The contract did not anticipate unexpected increases in the cost of material.  As a result your company has informed all of its customers that increased cost must be passed on for your firm to continue suppling the seats.  All of your customers reluctantly agreed to pay the additional cost.

c) 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. 

PLEASE DO NOT RELY ON WIKIPEDIA, INVESTOPEDIA OR ANY OTHER PEDIA AS A REFERENCE AT ANYTIME IN THIS COURSE.

FOR THE MAXIMUM POSSIBLE CREDIT OF 20 POINTS, YOU MUST COMPLETE ONE POST AND ONE FOLLOW-UP/REPLY.  MAKE SURE BOTH THE POST AND REPLY FOCUS ON THE QUESTIONS ASKED.

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