The hold-up problem increases a ﬁrm's transaction costs because _____.
A) the scarcity of raw materials increases the costs of production
B) labour unions hold-up production in order to bargain for higher wages
C) the ﬁrm is dependent upon one buying relationship
D) the assets involved in a hold-up problem are general in nature

Question

Quizplus · Accepted Answer

The hold-up problem refers to a situation where one party in a transaction has made substantial investments that are specific to the transaction, making them vulnerable to opportunistic behavior by the other party. This dependency increases transaction costs because the firm must take measures to protect itself against the risk of the other party exploiting this dependency, for example, by demanding higher prices or better terms. This is not directly related to the scarcity of raw materials (A), labor unions bargaining for higher wages (B), or the nature of the assets being general (D).

The Hold-Up Problem Increases a ﬁRm's Transaction Costs Because _____