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    Specialized Investments - g5

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    Kaonashi
    This document discusses specialized investments which facilitate relationship-specific exchange between two parties. Specialized investments have little value outside of the exchange relationship and include site-specificity where parties locate near each other, physical asset specificity using dedicated equipment, dedicated assets opened specifically for a buyer, and human capital in the form of skills developed for a particular firm. Relationship-specific exchange occurs when parties make specialized investments for their exchange, incentivizing them to cooperate and avoid under-investing in the relationship.

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    Specialized Investments - g5

    Uploaded by

    Kaonashi
    237 views15 pages
    This document discusses specialized investments which facilitate relationship-specific exchange between two parties. Specialized investments have little value outside of the exchange relationship and include site-specificity where parties locate near each other, physical asset specificity using dedicated equipment, dedicated assets opened specifically for a buyer, and human capital in the form of skills developed for a particular firm. Relationship-specific exchange occurs when parties make specialized investments for their exchange, incentivizing them to cooperate and avoid under-investing in the relationship.

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    managerial economics

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    This document discusses specialized investments which facilitate relationship-specific exchange between two parties. Specialized investments have little value outside of the exchange relationship and include site-specificity where parties locate near each other, physical asset specificity using dedicated equipment, dedicated assets opened specifically for a buyer, and human capital in the form of skills developed for a particular firm. Relationship-specific exchange occurs when parties make specialized investments for their exchange, incentivizing them to cooperate and avoid under-investing in the relationship.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    237 views15 pages

    Specialized Investments - g5

    Uploaded by

    Kaonashi
    This document discusses specialized investments which facilitate relationship-specific exchange between two parties. Specialized investments have little value outside of the exchange relationship and include site-specificity where parties locate near each other, physical asset specificity using dedicated equipment, dedicated assets opened specifically for a buyer, and human capital in the form of skills developed for a particular firm. Relationship-specific exchange occurs when parties make specialized investments for their exchange, incentivizing them to cooperate and avoid under-investing in the relationship.

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    You are on page 1of 15

    SPECIALIZED

    INVESTMENTS
     An expenditure which made to allow two
    parties to make exchange, but has little
    value in alternative uses.
     Investmentsmade to allow two parties to
    exchange but has little or no value outside
    of the exchange relationship.
     Aregood for the relationship between two
    parties, then parties are likely to under
    invest.
    EXAMPLE:
     Insuring crops when obtaining a loan
     Building trust with a sharecropper
    When specialized investments are required
    to facilitate an exchange, the resulting
    relationship between the parties is known as
    Relationship-specific exchange.

    Relationship-specific exchange is one which


    occurs when parties to the exchange have a
    specialized investments.
    TYPES OF SPECIALIZED
    INVESTMENTS
     Site-Specificity
     Physical-Asset Specificity
     Dedicated Assets
     Human Capital
    Site-Specificity
     Occurswhen buyer and seller of an input
    must locate their plans close to each
    other to be able to engage in exchange.
    EXAMPLE:
    Electric power plants often locate close
    to a particular coal mine to minimize the
    transportation costs of obtaining coal; the
    output(electricity) is less expensive to
    ship than the input(coal).
    Physical-Asset Specificity
     Refersto a situation where the capital
    equipment needed to produce an input is
    designed to meet the needs of a
    particular buyer and cannot be readily
    adapted to produce inputs needed by
    other buyers.
    EXAMPLE:
    If producing a lawn mower engine
    requires a special machine which is useful
    only for producing engines for a particular
    buyer, the machine is a specific physical
    asset for producing the engines.
    Dedicated Assets
     Aregeneral investments made by a firm
    that allow it to exchange with a
    particular buyer.
    EXAMPLE:
    Suppose a computer manufacturer
    opens a new assembly line to enable it to
    produce enough computers for a large
    government purchaser. If opening the new
    assembly line is profitable only if the
    government actually purchases the firm’s
    computers, the investment represents a
    dedicated asset.
    Human Capital
     Inmany employment relationships,
    workers must learn specific skill to work
    for a particular firm.
    EXAMPLE:
    Skills acquisition and building trust.
    References:
    Ordoña, C. (n.d). Managerial Economics – The Organization of the Firm. Retrieved
    from https://www.slideshare.net/mobile/diosahkc/managerial-economics-
    the-organization-of-the-firm on August 10, 2019
    GROUP 5
    MEDINA, Angelo Rey S.
    ALARCON, Mailene Mae S.
    BANLOG, Genrev Nicole Keith A.
    ABALOS, James Paul O.

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