What is hold-up in an alliance?
Hold-up – one firm makes more transaction-specific investments in an exchange than partner firms make and the firm that has not made these investments tries to exploit the firm that has made the investments. Describe the conditions under which a strategic alliance can be rare and costly to directly duplicate.
What is a post investment hold-up?
Hold-up arises when part of the return on an agent’s relationship-specific investments is ex post expropriable by his trading partner. Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges.
What is relationship specific investment?
As noted earlier, a relationship specific investment is an investment which once made (sunk) by one or both parties to an ongoing trading relationship has a lower value in alternative uses than it has in the intended use supporting this specific bilateral trading relationship.
What is sunk cost?
sunk cost, in economics and finance, a cost that has already been incurred and that cannot be recovered. In economic decision making, sunk costs are treated as bygone and are not taken into consideration when deciding whether to continue an investment project.
What is the underinvestment problem?
Key Takeaways. The underinvestment problem describes a conundrum whereby a company becomes so overleveraged that it can no longer make investments in growth opportunities. Economists recognize this situation as an agency problem that can arise between a firm’s debt holders and equity shareholders.
What are relation specific assets?
Assets are relationship-specific if their value is greater within a relationship than outside it. A typical example involves an upstream supplier who makes investments to customize her product for the needs of the downstream purchaser.
What does relationship-Specific mean?
According to the transaction cost theory (Williamson, 1985) relationship-specific investments defined as the degree to which assets are dedicated to a particular relationship create a lock-in situation for the investing party in inter- organizational relationships.
How is sunk cost treated?
What is the prime cost?
Prime costs are a firm’s expenses directly related to the materials and labor used in production. It refers to a manufactured product’s costs, which are calculated to ensure the best profit margin for a company.
Why do managers Underinvest?
When a firm has a very large level of debt, there comes a point when it can no longer borrow from creditors any longer. It leads to underinvestment in the firm. As a result, shareholders lose out both to creditors in the present and to future lost growth potential as well.
What is the debt overhang problem?
Debt overhang refers to a debt burden so large that an entity cannot take on additional debt to finance future projects. The burden is so large that all earnings pay off existing debt rather than fund new investment projects, making the potential for defaulting higher.
What is dedicated asset?
Dedicated assets, i.e. a discrete investment in a plant that cannot readily be put to work for other purposes.
Is there a first-best contractual solution to the hold-up problem?
Rogerson (1992) showed the existence of a first-best contractual solution to the hold-up problem in even extremely complex environments involving x agents with arbitrarily complex transaction decisions and utility functions. He shows that three important environmental assumptions must be made:
What is an example of the hold-up problem?
Inefficiency is caused by the hold-up problem when B is reluctant to make the investment ex ante from the fear that S uses its extra bargaining power to its own advantage. In that case the supplier is ‘holding up’ the buyer. A historic example concerns the US car industry, but the example is sharply disputed by Coase (2000).
Does the hold-up problem lead to underinvestment in relation to investment?
The hold-up problem leads to severe economic cost and might also lead to underinvestment. It is often argued that the possibility of a hold-up can lead to underinvestment in relation-specific investment and thus inefficiency.
What is hold-up in trading?
Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges. For instance, workers and firms often invest in firm-specific assets prior to negotiating for wages.