Asset Specificity

What Is Asset Specificity?

In economics, asset specificity is the degree to which a thing of value, or even a person of value, can be promptly adjusted for different purposes. A thing with high specificity is valuable just for certain tasks or in certain conditions. An asset with low specificity is a more flexible resource, and in this way a more significant one.

Generally, the more specific an asset is, the lower its potential resale value is. There is a more modest pool of buyers for a highly particular resource.

Grasping Asset Specificity

Asset specificity is the degree to which an asset is helpful across numerous circumstances and for various purposes. It could be equipment intended to have a single function or labor prepared to perform a single task. Think of a generalist who can perform many tasks and wear many caps inside a startup versus an employee with deep experience in a single function.

Tweaked computer software is an illustration of a highly specific asset. The oil and gas industry, the airline industry, and the manufacturing sector all have high asset specificity. Oil drills, jetliners, and assembly lines are not effectively or inexpensively adjusted to different purposes.

Generally, industries in the service sector and individuals that staff them have low asset specificity. Education, government, and finance all require highly skilled labor powers comprised of people who can adjust to different callings. The vast majority of the facilities and equipment they depend on additionally can be adjusted.

Asset Specificity in Contracts

Asset specificity can be an issue in contractual agreements between companies. An agreement might require one company to build and utilize highly specific assets that are of value just to the next company in the contract. It might likewise expect that other company to depend entirely on the company that is making those highly specific assets.

Asset specificity can be a red flag to one or the other party in a contract negotiation. It generally calls for a long-term business commitment.

For instance, say a manufacturer is offered a contract to build another device that has an unusual form and is made of unusual materials. A new and costly machine must be uniquely fabricated just to make this device.

Those companies are really stayed with one another. The manufacturer must depend on a single customer to order adequate amounts to make that machine beneficial. The buyer is dependent on a single provider for its new contraption and can't compare prices and quality among different sources.

Negotiations for such a contract would most likely depend on long-term commitments that safeguard the two players.

Variations on Asset Specificity

One variation of asset specificity is site specificity. An asset may be considered highly specific since it is unimaginable or restrictively costly to move to an alternate location.

There likewise is physical specificity, which shows equipment, machinery, or software that has been modified for a specific customer or a unique use.

Human asset specificity is a heavy term for company employees who are highly prepared in a particular task that isn't effectively transferable.

Highlights

• A resource that is redone for particular purposes has high specificity.
• A resource that can be promptly adjusted for some designs is said to have low specificity.
• The resource that has low specificity generally has a higher resale value.