What Is Asset Specificity?

In economꦯics, asset specificity is the degree to which a thing of value, or even a person of value, can be readily adapted for other purposes. A thing with high specificity is useful only for certain tasks or in certain c🌺ircumstances. An asset with low specificity is a more flexible resource, and therefore a more valuable one.

Generally, the more specific an asset is, the lower its po𓄧tential resale value is. There is a smaller pool of buyers for a highly speciaꦰlized resource.

Understanding Asset Specificity

Asset specificity is the degree to which an asset is useful acro🎉ss multiple situations and for multiple purposes. It may be equipment designed to have a single function or labor trained to perform a single task. Think of a generalist who can perform many tasks and wear many hats within a startup versus an employee with deep experience in a single function.

Customized computer software is an example of a highl﷽y 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 no🅰t easily or cheaply adapted to other purposes.

Generally, industries in the service sector and the people that staff them have low asset specificity. Education, government, and finance all require highly skilled labor forces made up of individuals who can adapt to other professions. Most of the facilities and equipment they rely on also can be adapted.ꩵ

Asset Specificity in Contracts

Asset specificity can be an issue in contractual agreements between companies. An agreement may require one company to build and us🥂e highly specific assets that are of value only to the other company in the contract. It may also require that other company to rely solely on the company that is creating those highly specific assets.

For example, say a manufactuꦅrer is offered a contract to build a new gadget that has an unusual form and is made of unusual materials. A new and expensive machine must be custom-built just to manufacture this gadget.

Those c༺ompanies are effectively stuck with each other. The manufacturer must rely on a single customer to order sufficient quantities to make that machine profitable. T🤡he buyer is reliant on a single supplier for its new gadget and is unable to compare prices and quality among various sources.

Negotiations for such a contract would probably rely on long-term commitments that protect b�ജ�oth parties.

Variations on Asset Specificity

One variation of asset specificity is site specificit⛎y. An asset might be considered highly specific because it is impos꧑sible or prohibitively expensive to move to a different location.

There also is physical spec😼ificity, which indicates equipment, machinery, or software that has been customized for a specific customer or a unique use.

Human asset 📖specificity is a ponderous term for company employees who are highly trained in a specialized task that is not easily transferable.