Lecture 8B - Transaction costs

Question 1

What is Asset specificity?

Answer 1

Asset specificity refers to the transferability of the assets that support a given transaction. Assets with a high amount of specificity represent sunk costs that have little value outside of a particular exchange relationship.

Question 2

Costs of production and coordination in markets (buying) vs. in hierarchies (making)

Answer 2

Transaction imperfections / costs
– Information asymmetries
– Uncertainty
– Time

Coordination costs:
 - information exchange 
In markets:
- supplier selection 
- contract negotiation
In hierarchies:
- Managerial decision-making
- planning
- Control & accounting

Question 3

Transaction costs

Answer 3

transaction costs include both the direct costs of managing relationships and the possible opportunities costs of making inferior governance decisions.

The basic premise of TCA is that if adaptation, performance evaluation, and safeguarding costs are absent or low, economic actions will favour governance. If these costs are high enough to exceed the production costs advantages of the market, firms will favour internal organization.

Question 4

Bound rationality?

Answer 4

Bound rationality is the assumption that decision makers have constraints on their cognitive capabilities and limits on their rationality.
- This becomes an apparent problem due to environmental uncertainty (external conditions change of the relationship making it less valuable) and behavioural uncertainty (issue with maintaining quality / monitoring performance - “the degree of difficulty associated with assessing the performance of transaction partners”.)

Question 5

What are the six types of Asset Specificity

Answer 5

1) Site specificity
2) Physical assets specificity
3) human asset specificity
4) temporal brand name capital
5) dedicated assets
6) temporal specificity

Site specificity
– Immovable
– Available only at a certain location – Example: natural resources

Physical asset specificity
– Designed for a single purpose
– Hard to repurpose / retool / reconfigure
– Example: specialized machinery

Human asset specificity
– Specialized human skills / knowledge
– Hard to transfer between individuals
– A rare specialization or highly contextual knowledge
– Example: CEO’s knowledge of firm structures and processes

Time specificity
– Value depends on when the asset reaches the
consumer
– Examples: stock quotes; perishable products

Question 6

The safeguarding problem –> an add on to opportunism and asset specificity

Answer 6

A safeguarding problem arises when a firm deploys specific assets and fears that its partner may opportunistically exploit these investments. Thus it is a product of opportunism and asset specificity.