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 ?
Asset specificity seems to be the most solid construct, with a relevant effect on the value coming from the relationship and being present in some of the moderating effects of the environmental variables.
The results seem to support the hypothesis that the increase in asset specificity (additional capital investment requirements) causes a fall in grower compensation rates and that greater integrator concentration results in a small but economically meaningful reduction in grower compensation.
Another contribution of the paper is to introduce and discuss the concept of system asset specificity, whereby the value of assets may depend on multilateral relationships rather than the bilateral relationships traditionally studied in TCT.
So the optimal governance structure selection is influenced by three attributes: asset specificity, frequency and uncertainty.
Together with asset specificity, frequency and uncertainty complete the set of transaction attributes that may influence the choice of contractual forms (Williamson, 1985, 1996).
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.
Assuming that agents have bounded rationality (i.e., it is not possible to write complete contracts) and behave opportunistically in those grey areas, Williamson (1985) considers key attributes for transactions to be: (a) asset specificity; (b) frequency; (c) uncertainty.
System stability [[right arrow].sup.+] technical innovation[[right arrow].sup.+] asset specificity [[right arrow].sup.+] Interdependent degree [[right arrow].sup.+] system stability
The transaction was the basis for his analysis with the dimension of asset specificity as the most crucial.
According to TCT, asset specificity, uncertainty, and frequency are the three main constructs along which transactions differ, with the governance structure that would prove most efficient being impacted (7, 8).
Asset specificity, product perishability and market volatility cause uncertainty and pose hazards to the investment of dairy farmers.