Asset Specificity and the Governance Forms: Do dyad perspective and endogeneity matter?

Abstract

The paper examines standard transaction cost economics (TCE) logic associating asset specificity to governance forms—market or hierarchy. It follows widely accepted standard TCE assumptions, considers endogenous selection of asset specificity and governance modes, and emphasizes either partner’s profit maximizing interest equally. The assessment shows that high asset specificity is not a necessary condition for hierarchy; consequently low asset specificity is not a sufficient condition for market exchange. And absent heterogeneity across partners, arguments linking low asset specificity (or symmetrically high asset specificity) to market exchange hold only for a limited set of transactions. Further, TCE suggested endogenous association between levels of TSIs and governance forms holds only partially. The paper offers testable propositions.