Question

Describe what Asset specificity is and what is uncertainty

Answer 1

Asset specificity means asset that can be used only in certain specific situation . It is the degree to which asset can be used in multiple situations or certain purposes. For example , customized machinery or plants are highly asset specific as they are build for a purpose. Another buyer may have its different use and could be less specific. Usually manufacturing , oil and gas , airline sectors have high asset specificity while service sector has low asset specificity

Uncertainty is the volatility occured due to economical , or enviromental disturbances or based on partnership performances. Any kind of transaction is prone to disturbance , thus uncertainty increases transaction costs. This disturbance is either caused by bounded rationality i.e. hard to predict (e.g. if commodity prices would go up or down) or opportunistic behaviour ( e.g. trading partner may delay the delivery of good). Thus uncertainty comes from outside with possibility of gain or loss that has no odds.