The economic organisation of specific assets
How to cite this publication:
Ola Kvaløy (2000). The economic organisation of specific assets. Bergen: Chr. Michelsen Institute (CMI Working Paper WP 2000:14)
In the international offshore industry we find that the oil companies and their main suppliers usually operate with separate ownership. But the main contractors manage a capital stock, and produce inputs, that are highly specific to the oil companies. Within the traditional theory of the firm this organizational solution emerges as a puzzle. Asset specificity is usually considered as an argument for vertical integration. The idea is that integration reduces the problem of opportunistic behavior. In this article I show that asset specificity actually can be an argument for separate ownership. While an integrated supplier considers the asset specificity as unimportant for his strategic behavior, disintegrated parties find that a high degree of specificity makes opportunistic behavior less profitable than if the assets enjoyed a low degree of specificity. Asset specificity can thus function as a buffer against opportunistic behaviour. This buffer can create room for strong incentive schemes.
