Hold-up problem or another problem, Managerial Accounting

According to the Philadelphia Inquirer, in 2004 the city of Philadelphia planned to spend $14 million to convert the Convention Center into an appropriate venue for the Republican Nominating Convention (RNC). The city engaged Devon Design and Construction in a contractual relationship to complete the work, which was supposed to start 48 days prior to the commencement of the RNC on July 26. However, when negotiations between Philadelphia's mayor and the police union broke down, the Philadelphia Police Patrolmen's Association took to the picket lines surrounding the Convention Center and prevented construction crews from beginning the work. The Inquirer reported that "a truck attempting to deliver steel turned around after a crowd of union members stood at a chain-link gate in front of the arena, shouting 'back it up,' and 'respect the line, buddy.'" Moreover, the Inquirer reported that "On-duty police officers, who had been instructed to prevent pickets from restricting access, did not intervene." Given the tight construction schedule, construction delays are reportedly costing about $100,000 per day. Identify the principal-agent problem that exists in this situation. Are the mayor and the city of Philadelphia facing the classical "hold-up problem" or another problem? Explain. 

Posted Date: 3/12/2013 8:25:41 AM | Location : United States

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