Question

Explain how asset specificity can lead to transaction costs. 300 words

Answer 1

Asset specificity is a concept which relates to a transaction's inter-party relationships. Generally it is described as the degree to which the contributions made to help a specific activity have a higher benefit than they would have if they were redeployed for some other reason. Asset specificity has been researched widely in a number of fields of business and economics such as communications , finance, corporate behavior, and knowledge management systems. The definition of the specificity of assets is loosely associated with that of opportunism. Classical economics believe that the "perfectly reasonable economic man" exists. Earlier economics methods also believed that two contractually binding companies should hold to the contract like they were meant to. A party to a transaction may be opportunistic in manufacturing lower quality items, shipping products late, or refusing to follow up with contract requirements. The notion of "bounded reason" is another central aspect in Williamson 's scholarship. Bounded rationality is characterized as a type of semistrong rationality in which actors are believed to be intentionally moral, but only to a limited degree. Humans have restricted exposure to information and insufficient ability to interpret the information to which we have exposure. So actors should behave rationally, but within their capability limits. Williamson concluded that market behavior's two most critical aspects are the challenges of unfair competitiveness and the tendency to behave opportunistically. Because of opportunism "Asset specificity" is an problem. An asset is specific because it only has a strong benefit when used in other purposes, so it has no interest in other uses. Asset specificity is often an aspect of a particular transaction, so because it can involve a higher danger to one participant in the deal, the transaction's expense would be larger.