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Post Investment Hold Up Discussion

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Post Investment Hold Up

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

Inchapter 5 Froeb discussed post-investment holdup as sunk cost problemassociated with contract specific fixed investments. The modern theoryof contracts is sometimes called the theory of joining wills whichsimply means, when parties make an agreement they are joining togetherto complete an endeavor of mutual interest. The problem with allcontracts that endure over time is that not all potential challenges canbe anticipated. The idea of joining wills is that parties will attemptto seek accommodations to advance their mutual interest, so long as thereturn on the invested activity pays off. Froeb illustrates the idea bythe example of marriage as a contract.

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

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

b)Your firm has an exclusive contract to assemble automobile seats for anumber of luxury models. Almost 100% of the materials are imported andof those over 50% include parts manufactured in China. All of theprices on the parts from China increased by 25% when the US imposedtariffs on China. The contract did not anticipate unexpected increasesin the cost of material. As a result your company has informed all ofits customers that increased cost must be passed on for your firm tocontinue suppling the seats. All of your customers reluctantly agreedto pay the additional cost.

c)Your company took note of your progress toward your MBA and when thedirector for customer services left the company you were asked to takeover as interim director. You were encouraged to apply for thefull-time position once you got your MBA. You served for 13 months atwhich time your company was acquired by another company and yourposition was abolished.


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