The impact of asset specificity on single-period contracting

Asset specificity plays an important role in contracting independently of bounded rationality and opportunism. A model of risk-averse rational maximizers, acting within a state preference framework in which Nature is the only source of risk, predicts that (1) asset specificity reduces the contractua...

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Bibliographic Details
Published in:Journal of economic behavior & organization 1992-08, Vol.18 (3), p.373-389
Main Authors: Choate, G.Marc, Maser, Steven M.
Format: Article
Language:English
Subjects:
Assets
Construction contracts
Construction industry
Contract negotiations
Debt
Debt financing
Debt management
Economic models
Economic theory
Impacts
Industry
Management
Rationality
Risk aversion
Studies
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Summary:Asset specificity plays an important role in contracting independently of bounded rationality and opportunism. A model of risk-averse rational maximizers, acting within a state preference framework in which Nature is the only source of risk, predicts that (1) asset specificity reduces the contractual incentives and the scale of commitment by parties to a contract when incentive remains; (2) risk aversion augments the importance of asset specificity; and (3) asset specificity tends to necessitate default premia and lead to larger premia where these are needed to create mutual incentives. Two classes of contractual arrangements are illustrative: those in the construction industry and those associated with debt financing.
ISSN:0167-2681
1879-1751
DOI:10.1016/0167-2681(92)90016-5