Froeb Discusses Post-Investment Holdup As A Sunk Cost Proble

Froeb Discusses Post Investment Holdup As A Sunk Cost Problem Associ

Froeb discusses 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.

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 United States 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: Identify which of the above scenarios, if any, are an example of post-investment holdup. Choose one of the scenarios above. Define the following and explain each within the context of the chosen scenario: What is the sunk, or stranded, cost? What is the contract? Was the contract breached? What are the damages?

Paper For Above instruction

The concept of post-investment holdup pertains to situations where a party has made substantial specific investments after a contract has been established, which then renders them vulnerable to opportunistic behavior by the other party. This phenomenon exemplifies a classic sunk cost problem because investments made are often tailored to a specific contractual relationship and are difficult to recover if the relationship deteriorates or terminates unexpectedly due to unforeseen reasons. By analyzing the provided scenarios, it becomes clear that the most illustrative example of post-investment holdup is the situation involving the interim director who served the company for 13 months before the position was abolished following an acquisition.

In this particular scenario, the sunk or stranded cost is the time, effort, and organizational resources invested by the interim director in carrying out their duties, as well as the implicit costs associated with the temporary role, which are no longer recoverable once the position is eliminated. This cost is considered sunk because it was incurred after the employment contract was signed and cannot be recovered regardless of future actions or outcomes.

The contract in this scenario was the employment agreement between the interim director and the company, which specified the roles, responsibilities, and compensation arrangements for the position. The employment contract was breached in a manner when the company was acquired and decided to abolish the position, effectively terminating the contractual relationship before the expected term or upon agreed conditions. This raises questions about the contractual rights of the interim director, including whether proper notice or compensation was provided upon abolition of the role.

Damages in this context could include the loss of expected future income, account of accrued benefits, and possibly compensation for the investments made in serving the company during the interim period. This also involves considerations of whether the company acted in good faith and within the contractual provisions when terminating the role following the acquisition. Such damages are reflective of the economic loss suffered due to the early termination of the employment contract and the associated sunk costs.

This scenario encapsulates the core aspects of post-investment holdup because the company's decision to terminate the position after the acquisition exposes the vulnerability of the interim director’s investments, which cannot be undone or recovered once the position is abolished. The example aligns with Froeb's theory by illustrating the strategic risks that arise when specific investments are made after the initial contract but before a potential future dispute or organizational change, emphasizing the importance of contractual safeguards and risk management in preventing holdup problems.

References

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