Specific Asset Investments Research Articles

The Impact of Environmental Uncertainty and Asset Specificity on the Degree of Buyer-Supplier Commitment

When manufacturers purchase products from suppliers, the types of relationships they establish may depend on many factors. These relationships can range from formalized, extensive contractual obligations to discrete individual purchases. This study investigates the potential determinants of where on this continuum of commitment the relationship lies. These determinants include uncertainty in both the supplier market and the buyer's customer market, the investment in transaction specific assets by both buyer and supplier, and the investment in product specific assets. Results indicate that market diversity, supplier concentration, investment in product specific assets, and the supplier's investment in transaction specific assets are potential reasons for higher levels of buyer-supplier commitment.

Have Tax Reforms Affected Investment?

We improve upon existing approaches used to estimate investment models by exploiting tax reforms as natural experiments. We find that tax policy has an economically important effect through the user cost of capital on firms' equipment investment following major tax reforms enacted in 1962, 1971, 1981, and 1986. This effect is most pronounced for firms not in tax loss positions and, thus, more likely to face statutory tax rates and investment incentives. We also demonstrate that tax-induced variation in the user cost of capital across equipment asset classes is negatively related to asset-specific investment forecast errors following major tax reforms, suggesting that ex ante knowledge of an impending tax reform can improve forecasts of investment.

Unionization, Incomplete Contracting, and Capital Investment

This article examines empirically the hypothesis that incomplete contracts and resulting opportunistic behavior over the return to sunk assets reduces investment. Union-firm contracts are incomplete because they (1) do not prevent all actions aimed at changing the existing contract; (2) cover a relatively short time period; and (3) do not extend to union members yet to be hired. The primary response of firms is to reduce investment in specific durable assets and also to reduce employment growth and increase debt. The authors find fairly strong evidence of these effects in a sample of large publicly traded firms using firm-specific measures of unionization. Copyright 1993 by University of Chicago Press.

Strategic Bargaining and Vertical Separation

Current theories of the vertical limits to firm size emphasize the consequences of opportunistic behavior by managers. The authors introduce opportunistic wage setting by labor unions and trace the implications for profit and investment in specific assets. Although subcontracting to an independent supplier leaves the entrepreneur with a reduced share of the surplus, he is able to pass on the responsibility for making certain investments. Two significant results are that either subcontracting or vertical integration may be privately preferred yet socially inefficient; and there is no straightforward relationship between organizational choice and specific capital intensity. Copyright 1991 by Blackwell Publishing Ltd.

Cooperation, Opportunism, and the Invisible Hand: Implications for Transaction Cost Theory

Transaction cost theorists have generally neglected to consider the implications that the invisible hand of the market mechanism can have for the risk of opportunism. In the long run, the invisible hand deletes actors whose behaviors are habitually opportunistic. Consequently, as markets move toward the state of competitive equilibrium, the risk of opportunism will be low, even for transactions supported by specific asset investments. Therefore, in many contexts the transaction cost rationale for internalization has been overstated.

The Comparative Advantage of Long-Term Contracts and Firms

This paper analyzes the choice between long-term and firms. The basic setup is a two-stage version of a vertical integration problem. In stage one, the upstream and downstream managers, respectively, expend costreducing and revenue-enhancing effort. In the second stage, managers observe private information about upstream costs and downstream revenues, and a quantity decision is made. This paper focuses on the ex ante choice between long-term and firms, before specific investment. The central contribution is to provide a simple, testable theory of the implicit efficiency tradeoffs between long-term and firms. Longterm contracts are defined as arrangements where parties prespecify a nonlinear (transfer) pricing schedule before investment in specific assets. One then sets output, and each manager is compensated out of the residual earnings of the portion of production they manage. Under a firm one of these stages is owned by the other, and the manager of that stage is then

A note on optimal procurement contracts

In many transactional relationships, new information and varying circumstances make it desirable to change contract terms well after investments in specific assets have created a situation of bilateral monopoly. Decisions about specification changes are made on the basis of asymmetric information between the buyer and the seller about costs and valuations. The analysis herein indicates how ex post public information might be employed to achieve a fully efficient method for determining specification changes and their reimbursement.