What is relationship specific investment

As noted earlier, a relationship specific investment is an investment which once made (sunk) by one or both parties to an ongoing trading relationship has a lower value in alternative uses than it has in the intended use supporting this specific bilateral trading relationship.

What are relationship specific assets?

Assets are relationship-specific if their value is greater within a relationship than outside it. A typical example involves an upstream supplier who makes investments to customize her product for the needs of the downstream purchaser.

How can the hold-up problem be mitigated?

A final way in which hold-up problems can be mitigated is if one player reduces their relative added value by making it costly to break existing arrangements. This can be achieved if that player cuts off their own outside options; that is, they burn their bridges.

What is post investment hold-up?

Hold-up arises when part of the return on an agent’s relationship-specific investments is ex post expropriable by his trading partner. … Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges.

What are the conditions that can give rise to a hold-up problem?

A hold-up problem arises when two factors are present: Parties to a future transaction must make noncontractible relationship-specific investments before the transaction takes place.

What is a transaction specific asset?

1. This is the extent to which investments made to support a particular transaction or relationship have a higher value to that transaction or relationship than they would have if deployed for any other purpose.

What does high asset specificity mean?

The degree to which an asset can be used for different purposes. High specificity means that there is little opportunity to use an asset for anything other than its initial intended purpose. Low specificity means that an asset has many possible different uses.

What is ex ante demand?

The term ex-ante (sometimes written ex ante or exante) is a phrase meaning “before the event”. Ex-ante or notional demand refers to the desire for goods and services which is not backed by the ability to pay for those goods and services. This is also termed as ‘wants of people’.

What is hold up in an alliance?

Hold-up – one firm makes more transaction-specific investments in an exchange than partner firms make and the firm that has not made these investments tries to exploit the firm that has made the investments. Describe the conditions under which a strategic alliance can be rare and costly to directly duplicate.

Which of the following is a characteristic of an implicit contract?

The correct answer is (a) It is an understanding between parties in a business relationship.

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What does relationship Specific mean?

According to the transaction cost theory (Williamson, 1985) relationship-specific investments defined as the degree to which assets are dedicated to a particular relationship create a lock-in situation for the investing party in inter- organizational relationships.

Can contracts solve the hold up problem?

The option contract is an effective remedy for the hold-up problem; i.e., in the OC treatment we will observe more high investments than in the NC+ and in the FP treatment.

Which of the following describes when a manufacturer produces some of an input quantity itself and purchases the remaining portion from independent firms?

Tapered integration represents a mixture of vertical integration and market exchange, in which a manufacturer produces some quantity of an input itself and purchases the remaining portion from independent firms.

Which of the following is a reason for a firm to buy rather than make?

Which of the following is a reason for a firm to Buy rather than make? Upstream firms aggregate the demands of many buyers and provide economies of scale. What problem preventing complete contracts refers to the limits on the capacity of individuals to process information, deal with complexity and pursue rational aims?

What do vertical boundaries of a firm refer to?

In week 4, we discuss about vertical boundaries of the firm which define which activities in the vertical chain a firm should perform itself and which it should purchase from independent firms in the market. This concept is important for firms to formulate strategy.

What Japanese term describes a labyrinth of firms with long term semi formal relationships up and down the vertical chain?

What Japanese term describes a labyrinth of firms with long-term semi-formal relationships up and down the vertical chain? Kaizen. 28. Which of the following is a characteristic of an implicit contract? It is an understanding between parties in a business relationship.

What are the types of asset specificity?

Williamson describes five other Page 8 different types of asset specificity: site specificity, physical asset specificity, human asset specificity, temporal specificity and brand name capital (Williamson, 1991).

What is site asset specificity?

Site Specificity Site specificity occurs when investments in productive assets are made in close physical proximity to each other. Geographical proximity of assets for different stages of production reduces inventory, transportation, and sometimes processing costs. Consider the production of semifinished steel.

What is dedicated asset specificity?

Human asset specificity, i.e., highly specialized human skills, arising in a learning by doing fashion; and. Dedicated assets, i.e. a discrete investment in a plant that cannot readily be put to work for other purposes.

What is a specialized asset?

Asset specificity is the degree to which an asset is useful across multiple situations and for multiple purposes. It may be equipment designed to have a single function or labor trained to perform a single task. … Customized computer software is an example of a highly specific asset.

What are the three types of specialized assets?

They come in three types: site specificity, physical-asset specificity, and human-asset specificity.

Is a car a firm specific asset?

Entrepreneurs (companies) often use their own cars for business purposes, which are recorded as a part of the company’s fixed assets. Such cars are either owned by the particular entrepreneur (as an economic or a legal owner) or are just possessed by them (personal cars purchased through the financial lease).

What is exante and Expost demand?

Explanation: In Economics, ex ante demand means the amount of any commodity or service that a consumer is willing or expected to consume or purchase and ex post demand indicates the amount of the commodity or service that is actually purchased or consumed by the consumer or buyer.

What is the difference between ex-ante investment and ex post investment?

Ex-ante investment is the amount of investment which firms plan to invest at different levels of income in the economy. Ex-post investment, on the other hand, is the amount realised or actual investment in an economy during a year.

What is ex post opportunism?

tion to make principals and agents reach agreements. and honor them by (1) reducing opportunism ex. post (that is once, the relationship is in place), and. (2) coordinating and motivating the parties’ exchange. activities and processes.

Why is implicit contract important?

Under the implicit contract, a worker is able to reduce the fluctuation in their labor income and the employer is able to increase their average profit. Hence, both parties are better off than being in the spot market.

What is an example of an implicit contract?

An understanding between parties on acceptable forms of behaviour that is not part of any formal agreement. … For example, it has been suggested that Coca Cola has an implicit contract with its consumers not to alter the formulation of its standard cola product.

What's an example of an implied contract?

If a customer enters a restaurant and orders food, for example, an implied contract is created. The restaurant owner is obligated to serve the food, and the customer is obligated to pay the prices listed on the menu for it. An implied-in-fact contract may also be created by the past conduct of the people involved.

Do social connections mitigate hold up evidence from relation specific investment and innovation in vertical relationships?

We show that prior social connections can mitigate hold-up in bilateral relationships and encourage relation-specific investment and cooperation when contracts are incomplete.

Which statement best describes economies of scale?

Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable.

What term describes the optimal allocation of society's resources at a given point in time?

What term describes the optimal allocation of society’s resources at a given point in time? Static efficiency. Only $35.99/year. Which of the following is least likely a characteristic of profit persistence in an industry? Economic profits should quickly converge to zero.