3.3 Asset Specificity Theory


Tuesday, April 7, 2020

Quarantine Lecture 6


Today we cover another major framework for studying the theory of the firm, the theory of asset specificity. This approach focuses on the threat of opportunism by parties that have signed a contract and made specific investments (sunk costs) by depending on one another: parties could try to extort greater quasi-rents from one another, or else threaten to pull out of the contract, harming the other party.

Better-written enforceable contracts are one method of trying to minimize this type of transaction cost, but another method is vertical integration - merging the two parties (e.g. perhaps a manufacturer and a retailer) as a single firm, that does not have to worry about such opportunism.


See today’s readings which may help you understand the concepts, and which are the primary source of what I discuss today.

Class Livestream/Lecture Videos


Discussion Board

I have opened up a discussion board on BlackboardGo to this course on Blackboard, on the blue navigation bar on the left, see Discussion Board.

on the theory of the firm for this week and next week’s topics. You can use this to post questions, comments, or anything you’d like us to talk about regarding the theory of the firm. There are a lot of interpretations, and a fair amount of different literatures on this, so I am happy to discuss this. I am also genuinely curious and interested in what you think.

For now, I am not grading this in any way. Use this as a way to connect and make sure we are understanding the readings. (And I really enjoyed our first discussion!)

Perhaps later, when we get to applications and policy, we will take this up more seriously and I will grade for participation.

Assignments: Midterm Exam Due 8 PM Saturday April 11

Our midterm is posted, and is due by email as a PDF at 8:00PM Saturday April 11.