asset specificity


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asset specificity

the extent to which a TRANSACTION or CONTRACT needs to be supported by transaction-specific assets. Where a contract involves the need to create transaction-specific assets, this creates a fundamental transformation in the nature of the relationship between the parties to the transaction. Before investing in specific assets, the investing partner is likely to have many alternative trading partners, which allows for bidding competition. However, after the investment creates transaction-specific assets these become SUNK COSTS with no alternative use and the parties to the transaction then have no alternative trading partners. The terms of the transaction are then determined by bilateral bargaining between the parties to the transaction.

Bargaining between the parties can lead to opportunistic behaviour where one party in a contractual relationship seeks to exploit the other's vulnerability. For example, a seller might attempt to exploit a buyer who is dependent on the seller by claiming that the production costs have risen and pressing for an upward adjustment of the negotiated price. Such opportunistic behaviour seeks to exploit or ‘hold up’ one party to the transaction to benefit the other party For transactions with high asset specificity, the costs of MARKET transactions are high and such transactions are likely to be ‘internalized’ and conducted within organizations, for example a VERTICALLY INTEGRATED firm. See INTERNALIZATION.

References in periodicals archive ?
So the optimal governance structure selection is influenced by three attributes: asset specificity, frequency and uncertainty.
This version of the theory states that the key variables of asset specificity and uncertainty arising from opportunism increase costs of transactional relationships beyond the frictional transactions costs previously described.
It shows that despite the system stability enhancement can promote technology innovation, but innovation needs more capital investment, improve asset specificity, which makes members in the system of interdependence increased, thereby increasing the system stability.
The transaction was the basis for his analysis with the dimension of asset specificity as the most crucial.
Local partner asset specificity is measured by asking "to what degree the local partner has made significant investment which is specific to the products/technologies provided by the business unit.
According to Williamson, asset specificity is represented as the most important transaction variable (7); as a result, it has been the most scrutinized and empirically tested of these variables in studies spanning several fields, including business and non-business areas (e.
Asset specificity, product perishability and market volatility cause uncertainty and pose hazards to the investment of dairy farmers.
This article applies a central concept from transaction cost economics, the dependency of the optimal governance structure (decentralized or centralized) on certain characteristics of the production process for some good, called asset specificity (Williamson, 1989, p.
Williamson (1989) emphasizes the three key characteristics of uncertainty, frequency, and asset specificity, which affect the amount of transaction cost.
Incompleteness Costs: Asset Specificity, Property Rights, and
Asset specificity is seen as the most important as transactions that are supported by investments in transaction specific assets will, as a result of incompleteness, experience weak coordination and hence inefficient results (Williamson 2010).