Page 174 - E2 Integrated Workbook STUDENT 2018

Chapter 12

External control costs arise because of the following risk factors.

 Bounded rationality: the limits on the capacity of individuals to process
information, deal with complexity and pursue rational aims.

 Difficulties in specifying/measuring performance, e.g. terms such as 'normal
wear and tear' may have different interpretations.

 Asymmetric information: one party may be better informed than another, who
cannot acquire the same information without incurring substantial costs.

 Uncertainty and complexity.

 Opportunistic behaviour: each agent is seeking to pursue their own economic
self-interest. This means they will take advantages of any loopholes in the
contract to improve their position.

6.4 Asset specificity

The degree of asset specificity, is the most important determinant of transaction cost.
Asset specificity is the extent to which particular assets are of use only in one specific
range of operations.

The more specific the assets are, the greater the transaction costs would be

There are six main types of asset specificity:

 Site specificity – the assets may be immobile, or are attached to a particular
geographical location

 Physical asset specificity – this is a physical asset with unique properties

 Human asset specificity – where workers have particular skills or knowledge

 Dedicated asset specificity – a man-made asset which has been made to an
exact specification for a customer and only has one application

 Brand name capital specificity – a brand and associations that belong to one
family

 Temporal specificity – the unique ability to provide service at a certain time

168