Relationship specific investment wikipedia free

Transaction cost - Wikipedia

relationship specific investment wikipedia free

From Wikipedia, the free encyclopedia. Jump to navigation Jump to search. The theory of the firm consists of a number of economic theories that explain and predict the Why are firms structured in such a specific way, for example as to hierarchy . Thus, Coase defines the firm as "the system of relationships which comes. In general, to invest is to distribute money in the expectation of some benefit in the future – for Investors, particularly novices, are often advised to adopt a particular investment strategy and diversify their portfolio. . of other companies in the same industry, and examine trends in debt-to-equity ratios and free cash flow. Alpha is a measure of the active return on an investment, the performance of that investment 1 Definition in CAPM; 2 Origin of the concept; 3 Relation to beta lose money in a particular year are often chosen by those investors who feel that they and Management (IACAM) (Free Business Valuation E-Book Guidebook) .

If the internal transaction costs are higher than the external transaction costs the company will be downsized by outsourcing, for example.

Asset specificity

The idea that transactions form the basis of an economic thinking was introduced by the institutional economist John R. These individual actions are really trans-actions instead of either individual behavior or the "exchange" of commodities. It is this shift from commodities and individuals to transactions and working rules of collective action that marks the transition from the classical and hedonic schools to the institutional schools of economic thinking.

The shift is a change in the ultimate unit of economic investigation. The classic and hedonic economists, with their communistic and anarchistic offshoots, founded their theories on the relation of man to nature, but institutionalism is a relation of man to man.

The smallest unit of the classic economists was a commodity produced by labor. The smallest unit of the hedonic economists was the same or similar commodity enjoyed by ultimate consumers.

One was the objective side, the other the subjective side, of the same relation between the individual and the forces of nature. The outcome, in either case, was the materialistic metaphor of an automatic equilibrium, analogous to the waves of the ocean, but personified as "seeking their level.

Transactions intervene between the labor of the classic economists and the pleasures of the hedonic economists, simply because it is society that controls access to the forces of nature, and transactions are, not the "exchange of commodities," but the alienation and acquisition, between individuals, of the rights of property and liberty created by society, which must therefore be negotiated between the parties concerned before labor can produce, or consumers can consume, or commodities be physically exchanged".

However, recent scholars led by Oliver E. Williamsonstressed 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.

relationship specific investment wikipedia free

Therefore, actors will behave rationally, but within the limits of their capacity. Williamson argued that the two most important dimensions of business behavior are the problems of imperfect competition and the propensity to act opportunistically.

Definition[ edit ] Asset specificity is usually defined as the extent to which the investments made to support a particular transaction have a higher value to that transaction than they would have if they were redeployed for any other purpose McGuinness Williamson, argued that transaction-specific assets are non-redeployable physical and human investments that are specialized and unique to a task. For example the production of a certain component may require investment in specialized equipment, the distribution of a certain product may necessitate unique physical facilities, or the delivery of a certain service may be predicated on the existence of an uncommon set of professional know-how and skills.

Basically, asset specificity refers to the extent to which a party is "tied in" in a two-way or multiple-way business relationship.

Incomplete contracts

For example, learning to speak English, one of the most widely understood languages of the world, is a highly asset-unspecific investment, since your investment will be likely to have equal returns being able to communicate with others across a variety of different settings.

On the other hand, learning to speak Navajoa rare Athabaskan language spoken in the southwest United Statescould be highly asset-specific human asset-specific, specificallysince your investment return being able to communicate with others is high with the few Navajo-speaking people, but almost zero otherwise. Originally asset specificity is proposed mainly in a buyer-seller situation, where the buyer is the party that does not hold the specific assets and the seller is the party that holds the specific assets.

For example, in Williamson's model, the hold-up is unilateral: However later researchers have realized that asset specificity could be bilateral, or even multi-lateral. Thus individuals and groups tend to " satisfice "—that is, to attempt to attain realistic goals, rather than maximize a utility or profit function. Cyert and March argued that the firm cannot be regarded as a monolith, because different individuals and groups within it have their own aspirations and conflicting interests, and that firm behaviour is the weighted outcome of these conflicts.

Organisational mechanisms such as "satisficing" and sequential decision-taking exist to maintain conflict at levels that are not unacceptably detrimental. Team production[ edit ] Armen Alchian and Harold Demsetz's analysis of team production extends and clarifies earlier work by Coase. In effect, therefore, this is a "principal-agent" theory, since it is asymmetric information within the firm which Alchian and Demsetz emphasise must be overcome.

relationship specific investment wikipedia free

In practice this may have limited applicability small work group activities, the largest perhaps a symphony orchestrasince most outputs within a firm such as manufacturing and secretarial work are separable, so that individual inputs can be rewarded on the basis of outputs.

Hence team production cannot offer the explanation of why firms in particular, large multi-plant and multi-product firms exist, etc. Asset specificity[ edit ] For Oliver E.

Anthony Deden - Grant Williams - Real Vision™

If the transaction is a recurring or lengthy one, re-negotiation may be necessary as a continual power struggle takes place concerning the gains from trade, further increasing the transaction costs. Moreover, there are likely to be situations where a purchaser may require a particular, firm-specific investment of a supplier which would be profitable for both; but after the investment has been made it becomes a sunk cost and the purchaser can attempt to re-negotiate the contract such that the supplier may make a loss on the investment this is the hold-up problemwhich occurs when either party asymmetrically incurs substantial costs or benefits before being paid for or paying for them.

In this kind of a situation, the most efficient way to overcome the continual conflict of interest between the two agents or coalitions of agents may be the removal of one of them from the equation by takeover or merger. Asset specificity can also apply to some extent to both physical and human capital, so that the hold-up problem can also occur with labour e. Probably the best constraint on such opportunism is reputation rather than the lawbecause of the difficulty of negotiatingwriting and enforcement of contracts.

This is partly because it is in the nature of a large firm that its existence is more secure and less dependent on the actions of any one individual increasing the incentives to shirkand because intervention rights from the centre characteristic of a firm tend to be accompanied by some form of income insurance to compensate for the lesser responsibility, thereby diluting incentives.

Milgrom and Roberts explain the increased cost of management as due to the incentives of employees to provide false information beneficial to themselves, resulting in costs to managers of filtering information, and often the making of decisions without full information. Empirical analyses of transaction costs have attempted to measure and operationalize transaction costs.

relationship specific investment wikipedia free

Firm economies[ edit ] The theory of the firm considers what bounds the size and output variety of firms. This includes how firms may be able to combine labour and capital so as to lower the average cost of output, either from increasing, decreasing, or constant returns to scale for one product line or from economies of scope for more than one product line.

Hold-up problem - Wikipedia

GrossmanOliver D. Hartand John H.

relationship specific investment wikipedia free

In their seminal work, Grossman and HartHart and Moore and Hart developed the incomplete contracting paradigm. Specifically, consider a seller of an intermediate good and a buyer.

relationship specific investment wikipedia free

Should the seller own the physical assets that are necessary to produce the good non-integration or should the buyer be the owner integration? After relationship-specific investments have been made, the seller and the buyer bargain.