Question

Perhaps the most important kind of capital is human capital. For example, most lawyers spend years...

Perhaps the most important kind of capital is human capital. For example, most lawyers spend years learning to practice law. Lawyers are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. Suppose the government nationalizes the market for legal services, resulting in lower compensation for lawyers. Assume lawyers cannot easily move to other countries.

True or False: The investment in human capital for lawyers is not subject to post-investment hold-up.

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Answer #1

Hold up problem is arise when two parties can work efficiently by cooperating but they are concerned that they may give the other party increased bargaining power so that their profit is going to reduce. Hold up problem leads to economic cost and also underinvestment

Here lawyers made more investment because of more compensation in future when they will start work. But after nationalization, they will get lower compensation, which will demotivate them from investing in human capital.

Therefore the statement the investment in human capital for lawyers is not subject to post investment hold up is false.

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