What Is Asset Specificity?

The formation of the concept of asset specificity and its introduction to the analysis of trading behavior were put forward by Williamson's "Capitalist Economic System" when analyzing the issue of vertical integration. In the book "The Capitalist Economic System", Williamson uses asset specificity to explain the origin of transaction costs, and then studies the contract by transaction costs, and finds the corresponding governance structure from various types of contracts, thereby examining various economies System, and then compare these systems in terms of efficiency.

Asset specificity

Right!

The formation of the concept of asset specificity and its introduction to the analysis of trading behavior were put forward by Williamson's "Capitalist Economic System" when analyzing the issue of vertical integration. In the book "The Capitalist Economic System", Williamson uses asset specificity to explain the origin of transaction costs, and then studies the contract by transaction costs, and finds the corresponding governance structure from various types of contracts, thereby examining various economies. System, and then compare these systems in terms of efficiency.

Chinese name

Asset specificity

Asset specificity refers to assets that are locked after being used for a specific purpose and are difficult to be used for other purposes. If they are used for other purposes, the value will be reduced, and they may even become worthless assets.

amend as below:

"It may even become a worthless asset" The first thing to point out is that this is not a term referring to the asset element, but a term that evaluates the ease with which the asset element is transferred

The English term is Asset Specificity, as opposed to Asset homogeneity. Different industries have different factor qualities, element structures, and characteristics, that is, assets are specialized. Therefore, the reallocation of asset elements between different industries necessarily involves certain costs and incurs costs. The stronger the asset specificity of an industry element, the higher the conversion cost of changing old assets, so the industry s

The formation of specific assets will cause a "fundamental shift" in the nature of the contract. This fundamental conversion occurs during the trading process, because the large number of auctions at the beginning does not necessarily indicate that such a large number of auctions will continue to exist in the future. The effectiveness of ex-post competition depends on whether the goods or services exchanged are transaction-specific

Specific assets have two distinguishing characteristics:

(1) owned or controlled by a specific economic entity;

(2) It can only be used for specific purposes. If it is transferred to other uses or used by others, the value it creates may be reduced.

For a specific asset, its specificity refers to the extent to which the asset can lose its production value when it can be relocated to other alternative uses or used by others. Therefore, the specificity of an asset is directly proportional to the degree of loss of production value after its transfer and use. When the degree of such loss is zero, the asset becomes a universal asset.

According to the analysis of the above-mentioned neo-institutional economics school, it can be inferred that, for a specific asset, its degree of specificity can be expressed as the asset's liquidity and convertibility, and assets with strong liquidity and convertibility have poor specificity and strong versatility ; Assets with poor liquidity and convertibility have strong specificity and poor versatility. For highly specialized assets, if their specific uses are changed, the value loss is very large. For example, if an exhibition hall is planned to be built, and a hotel is changed due to market changes during the construction process, it will require a high amount of renovation costs. For highly liquid assets, if the original use is changed, the value loss can basically be ignored. For example, currency is the most liquid, so it can be used for any investment project.

For the analysis of the value of specific assets, we can introduce the concept of "occupancy quasi-rent" by American economist Lawrence Klein, that is, a specific asset is used optimally and suboptimally. Difference in value. He believes that under the condition that the assets are specific, one party to the transaction has an incentive to use the incompleteness of the contract to occupy the other party's quasi-rent. Transaction cost theory believes that investing in specific assets will have an opportunistic motive after the transaction, which is popularly a rip-off. This actually reflects the fact that specific assets can bring excess profits to the subject of property rights. For a company, once the investment in specific assets is in place, it can no longer be assumed that its competitors are still on the same starting line. In this case, the economic profit realized by the enterprise includes the excess profit (occupancy quasi-lease) brought by this special asset. However, if such special assets are relocated to other uses or other regions, not only this occupancy quasi-lease cannot be achieved, even its investment costs may not be recovered. Let us consider an example: the existing enterprise A and enterprise B, suppose that the product A of enterprise A is an important raw material of product B of enterprise B. Enterprise B's demand for product A is expanding. Company A needs to invest in special assets to expand the output of its A product. However, when enterprise A's special assets are in place and normal operations begin soon, enterprise B's product B is on the market. The gradual decline in sales leads to a decrease in demand for A product, making the production of A product unable to achieve the economies of scale in the operation of special assets, and therefore Company A's investment in this special asset has suffered significant losses. If it is necessary to evaluate this special asset of Company A, the appraiser should have to consider the asset depreciation caused by this loss.

In the asset valuation business, projects such as real estate valuation, machinery and equipment valuation, intangible asset valuation, and corporate value assessment are often involved. Generally, problems of special assets are encountered. This requires the evaluation agency and staff to reach a clear and clear consensus with the client on the specific purpose and use of the asset evaluation business, and to fully understand the legal, physical status and specific economic uses of the evaluation target. Especially for special assets, look at the conditions under which they create value for the subject of property rights, and whether these conditions can continue after the asset business occurs. If it cannot be continued, different value types should be considered.