Asset specificity and the fear of exploitation

Abstract

If asset specificity renders the investing party dependent ex post, why would the ex ante willingness to make relationship-specific investments vary? We show how specific investments generate both positive and counter-negative cooperative incentives. We also observe the influences of trust and time horizon on these incentives, which are aggregated to derive the specific investments effect (SIE). Our result suggests that while the fear of exploitation increases proportionally to the magnitude of specific investments and the attendant quasi-rents, it grows exponentially with the deterioration of inter-personal (trust) and/or inter-temporal (time horizon) contexts.