One Page Initial Post Instructions Review: The Three Scenari

One Page Initial Postinstructionsreview The Three Scenarios Below Lo

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.

Paper For Above instruction

The three scenarios presented offer distinct contexts in which post-investment holdup might occur, but only one clearly exemplifies the phenomenon. Post-investment holdup is a situation where, after a substantial investment has been made, one party becomes vulnerable to being held hostage or exploited due to the other party’s vested interest. It often involves issues of contractual breach, sunk costs, and damages, which warrant detailed analysis within each scenario.

Among the three scenarios, the case involving the chief financial officer (CFO) demonstrates a classic instance of post-investment holdup. The firm’s investment in hiring a highly qualified CFO at a significant salary of $250,000 per year constitutes a substantial sunk cost. Once this investment is made—both financially and in terms of human capital—and the CFO leaves after six months, the firm experiences a form of hold-up. The firm's vulnerability arises because the investment in hiring and onboarding the CFO was sunk; the firm cannot recover these costs, yet it bears the cost of losing a valuable executive. In this scenario, the breach pertains to the CFO’s resignation, which disrupts the contractual expectation and creates damages in terms of lost expertise and potential future contributions.

In contrast, the second scenario regarding the automobile seat assembly contract does not explicitly depict post-investment holdup. The contract was renegotiated to pass increased costs due to tariffs, and the customers reluctantly accepted the additional charges. There is no clear indication that one party leveraged the situation unfairly after making an investment, rather it reflects a reactive adjustment to external economic shocks.

The third scenario involving the interim director role illustrates a typical employment relationship that was terminated due to acquisition. The company’s acquisition and subsequent abolishment of the position are external events, and although there are sunk costs involved (training, onboarding), they do not necessarily constitute a post-investment holdup unless the employee was exploited after making substantial investments. Since the position was abolished due to external corporate restructuring, it does not fit the classic definition of post-investment holdup.

Definitions and Contextual Explanations

• Sunk or stranded cost: These are costs that have already been incurred and cannot be recovered. In the CFO scenario, the recruitment and onboarding costs, including salary and training expenses, are sunk costs. Once incurred, these costs cannot be recovered regardless of the future outcome.
• The contract: A legally binding agreement between parties outlining rights and obligations. In the CFO case, the employment agreement constitutes the contract. Breaching this contract—such as by the CFO leaving prematurely—can lead to damages and legal disputes.
• Was the contract breached? Yes, in the CFO scenario, the CFO’s resignation after six months constitutes a breach of the employment contract if there was a fixed-term agreement or specific obligations. This breach results in damages, including the cost of hiring process, onboarding, and lost productivity.
• Damages: The monetary or non-monetary losses incurred due to breach or non-compliance. For the CFO, damages include the costs associated with recruiting and training another executive, as well as potential disruptions in financial strategy or operations.

Overall, the CFO scenario exemplifies post-investment holdup, as the firm’s substantial investment in executive talent is undermined by the CEO’s departure, illustrating the vulnerability created after specific investments. Recognizing such scenarios underscores the importance of contractual safeguards and strategic planning to mitigate such risks in corporate investments.

References

• Aghion, P., & Bolton, P. (1992). An Incomplete Contracts Approach to Financial Contracting. Review of Economic Studies, 59(3), 473-494.
• Hart, O. (1995). Firms, Contracts, and Financial Structure. Oxford University Press.
• Klein, B., Crawford, R., & Alchian, A. (1978). Vertical Integration, Appropriable Rents, and the Competitive Contracting Process. Journal of Law and Economics, 21(2), 297-326.
• Klein, P. (2000). Contracting and Incentives. Harvard Business Review.
Economica, 55(220), 437-448.
• Williamson, O. E. (1985). The Economic Institutions of Capitalism. Free Press.
• Williamson, O. E. (1996). The Mechanisms of Governance. Oxford University Press.
• Zhao, J., & Ryan, S. (2011). Post-Contractual Opportunism and Contract Enforcement. Journal of Corporate Finance, 17(4), 915-929.