Asset Specificity - Overview

Overview

The concept of asset specificity is closely related to that of opportunism. Classical economists assume the existence of the "perfectly rational economic man". Previous approaches to economics often assumed that two contractually bounded firms will stick to the contract as they are supposed to. However, recent scholars led by Oliver E. Williamson (1975, 1985) stressed the issue of opportunism. A party to a transaction could be opportunistic by producing poor quality goods, delivering products late, or not following through with provisions of a contract. Another key element of Williamson's scholarship is the idea of "bounded rationality". Bounded rationality is defined as a semistrong form of rationality in which actors are assumed to be intendedly rational, but only to a limited extent. Human beings have limited access to knowledge and a limited ability to process the knowledge we have access to. Therefore, actors will behave rationally, but within the limits of their capabilities. Williamson argued that the two most important dimensions of business behavior are the problems of imperfect competition and the propensity to act opportunistically. "Asset specificity" becomes an issue because of opportunism.