Question

From our class discussion, which of the following is not a solution to the holdup problem?

1) Renegotiating the contract
2) Implementing a penalty clause
3) Establishing trust between parties
4) Increasing the price of the product

Answer 1

The holdup problem can be addressed through renegotiating the contract, implementing a penalty clause, and establishing trust between parties. Increasing the price of the product is not an effective solution to the holdup problem.

Step-by-step explanation:

The holdup problem refers to a situation where one party may take advantage of its bargaining power and demand more favorable conditions after an agreement has been made. To address the holdup problem, different solutions can be implemented.

1. Renegotiating the contract: This involves revisiting and modifying the terms of the agreement to ensure fairness and prevent one party from exploiting the other.
2. Implementing a penalty clause: A penalty clause can act as a deterrent to prevent one party from reneging on their commitments by imposing financial consequences if they fail to fulfill their obligations.
3. Establishing trust between parties: Building trust through open communication, transparency, and mutual understanding can reduce the likelihood of holdup problems arising.

Therefore, the solution that is NOT effective in addressing the holdup problem is increasing the price of the product. While increasing the price may benefit one party in the short term, it does not address the underlying issue of trust and renegotiation.