Hold-up problems usually occur when
A)One of the parties makes a heavy investment in equipment specific to its trading partner
B)One of the firms decides to invest heavily in general purpose equipment
C)Costs are avoidable
D)Costs are incurred

Question

​Hold-up problems usually occur when
A)​One of the parties makes a heavy investment in equipment specific to its trading partner
B)One of the firms decides to invest heavily in general purpose equipment
C)Costs are avoidable
D)​Costs are incurred

Quizplus · Accepted Answer

Hold-up problems arise when one party invests heavily in equipment that is specific to its trading partner. This is because the other party may use their position to extract more favorable terms in the future, knowing that the first party has already sunk significant costs into the relationship. Option B is incorrect because investing in general purpose equipment does not necessarily create a hold-up problem. Options C and D are irrelevant to the definition of hold-up problems.

​Hold-Up Problems Usually Occur When

Hold-Up Problems Usually Occur When