A holdup problem occurs
A)when a financial institution undertakes too little investment in security.
B)when one firm must make a specific investment and a second firm takes advantage of it.
C)if the firm that moves second in a Stackelberg game chooses the incorrect output level.
D)if you are entering into a contract with a government entity.

Question

Quizplus · Accepted Answer

In a holdup problem, one firm must make a specific investment and a second firm takes advantage of it, leading to inefficient outcomes. This can occur when there is no way to contractually specify how the parties will share the gains from the investment or when there is a lack of trust between the parties. Therefore, option B, which identifies the correct description of a holdup problem, is the best choice. Options A, C, and D do not accurately describe what a holdup problem is.

A Holdup Problem Occurs