Question

Explain how asset specificity can lead to transaction costs

please give 2 examples

Please explain well and upto 500 words

Please solve asap

Answer 1

The asset specificity is the extent to which values ​​or even valuable people can be easily adapted for other purposes. Something with high precision is useful only for certain tasks or in certain circumstances. Low-precision assets are flexible resources and therefore more valuable.
Generally, the more specific the asset, the lower the potential resale value. There are smaller pools than buyers for highly specialized resources.

Asset specificity is the extent to which assets are useful in many situations and for many purposes. This could be a device designed to have a single function or a workforce trained to perform a task.

Personal computer software is an example of a specific asset. The oil and gas industry, the airline and the manufacturing sector are highly qualified. Oil drilling, air ducts, aircraft and assembly lines are not flexible or cheap for other purposes.
In general, the service industry and the people who serve them are lowly qualified. Government and financial education requires a highly skilled workforce made up of individuals who can adapt to other professions. Most of the equipment and tools on which they rely can also be modified.

The asset specificity may be an issue in the contract agreement between the companies. This agreement may require one company to create and use highly specific assets that benefit other companies in the contract. It may also require other companies to rely on companies that create these highly specific assets.
For example, let’s say a manufacturer is contracted to build a new device that has an unusual shape and is made from unusual materials. Only new and more expensive machines had to be built to order for this equipment.
These companies are glued together effectively. The manufacturer has to rely on one customer to order a sufficient quantity to make this machine profitable. The buyer relies on one supplier for his new equipment and cannot compare prices and quality between different sources.

Negotiations on such a treaty are likely to rely on long-term commitments that protect both parties.

One change in the specific nature of the property is the asset specificity. Property can be considered specific because it is impossible or too expensive to move elsewhere.

It also has physical specifications that show machine tools or software that are customized for specific customers or special uses.

The asset specificity assets is a powerful word for highly trained company employees in non-transferable skills.
The asset specificity is a term related to the interpersonal relationships of transactions. It is usually defined as a level at which investments made to support a particular transaction are more valuable for that transaction than they would be if they were positioned for other purposes. Asset specificity is studied in detail in various areas of management and economics, such as markets, accounting, organizational behavior, and information management systems.