Question

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.

Answer 1

Answer: False

Explanation:

Lawyers investing heavily in their human capital is quite subject to post-investment hold-up which refers to returns being held-up after a person has already gone into an investment.

The post-investment hold-up here is that the government nationalized the legal profession and offered lower salaries to lawyers who expected to be making a lot of money.

Should prospective lawyers see this, they will become discouraged and invest less in human capital there by proving that their investment is subject to post-investment hold-up.