Elgar original reference
Edited by Peter G. Klein and Michael E. Sykuta
Chapter 12: Asset Specificity and Holdups
Benjamin Klein Specific assets are assets that have a significantly higher value within a particular transacting relationship than outside the relationship. To illustrate, consider the classic Fisher Body–General Motors case.1 In 1919 Fisher Body undertook a very large expansion in its capacity to supply bodies to General Motors. Automobile bodies, like many other productive inputs, are not sold in a spot market. Therefore, if General Motors decided to stop purchasing from Fisher after Fisher Body made its capacity investments, the Fisher capacity used to produce bodies for General Motors could not immediately and costlessly be transferred to the production and sale of bodies to other automobile companies. Consequently, once Fisher Body made the investment, the plants Fisher built to supply General Motors had a higher value within the General Motors relationship than outside the General Motors relationship. The difference in value within and outside the General Motors relationship is equal to the General Motorsspecific element of the assets.2 The economic relevance of specific assets is that they create the potential for holdups. Once a transactor makes a relationship-specific investment, its transacting partner has the ability to take advantage of the specificity to appropriate some of the rents the transactor expects to earn on the investment. For example, after Fisher Body made its somewhat General Motors-specific capacity investments General Motors could threaten to stop purchasing bodies from Fisher and impose a capital cost on Fisher Body equal to the value of the General Motors-specific element of Fisher’s capacity investments. Therefore,...
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