When one firm makes more transaction-specific investments in a strategic alliance than partner firms make, that firm may be subject to a form of cheating called ________ that occurs when a firm that has not made significant transaction-specific investments demands returns from an alliance that are higher than what the partners agreed to when they created the alliance.

Question

Quizplus · Accepted Answer

The situation described is an example of holdup, where one partner takes advantage of the transaction-specific investments made by the other partner and demands higher returns than what is fair. Adverse selection refers to a situation where one partner has better information than the other partner and uses this advantage to negotiate better terms. Moral hazard occurs when one partner takes risks because they know the other partner will bear the cost of failure. Noncompliance refers to one partner failing to adhere to the terms of the alliance agreement.

When One Firm Makes More Transaction-Specific Investments in a Strategic