Beware Specific Investments

Making relationship-specific investments places you at risk of post-investment holdup. As everyone's favorite textbook notes, "Anytime that a party makes a specific investment--one that is sunk or lacks value outside the relationship--it can be held up by its trading partner."

A number of chicken farmers are experiencing the problem of specific investments. These farmers build buildings specific to the raising of chickens and contract with companies like Pilgrim's Pride, Tyson Foods, and Perdue to raise chickens for the companies.

Today's chicken houses are bigger and more sophisticated than the coops of yore. Made from corrugated metal and wooden beams, the cavernous shacks can be longer than a football field and cost more than $200,000. To maximize profits, many farmers own at least four, meaning high-six-figure mortgages are common.

Inside the biggest such coops, more than 20,000 chickens spend their lives pecking at feeders and water spigots on a dirt floor. Computers regulate temperature. Most houses are kept dark to minimize activity so birds pack on more pounds.

With the slowdown in chicken consumption, the chicken companies have been cancelling contracts with farmers, leaving the farmers on the hook for mortgages on buildings that have little value other than for housing chickens.