Asset Specificity
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Definition of 'Asset Specificity'The use of a capital good to a narrow purpose. Asset specificity applies to capital designed to have a single function, or labor trained to perform a single task, and has its limited uses because of some inherent restriction on other possible uses. The more specific an asset, the lower its potential resale value or redeployability. Companies may be reluctant to invest in such assets in a poor or uncertain economy. When a company purchases a highly specific asset, this purchase is considered a sunk cost, since the asset will likely not be saleable or useable for purposes other than its intended purchase. |
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Investopedia explains 'Asset Specificity'The use of a capital good to a narrow purpose. Asset specificity applies to capital designed to have a single function, or labor trained to perform a single task, and has its limited uses because of some inherent restriction on other possible uses. The more specific an asset, the lower its potential resale value or redeployability. Companies may be reluctant to invest in such assets in a poor or uncertain economy. When a company purchases a highly specific asset, this purchase is considered a sunk cost, since the asset will likely not be saleable or useable for purposes other than its intended purchase.For example, an asset might be located at a particular location and be impossible or prohibitively expensive to move; this type of asset specificity is called "site specificity." A manufacturing plant is an example of a highly specific asset, because it is difficult or impossible to relocate and difficult or impossible to adapt to another use. Customized computer software is also an example of a highly specific asset. Typically, service sector industries have lower asset specificity while the oil and gas industry, the airline industry and the manufacturing sector have the highest asset specificity. Opportunism is another potential problem with highly specific assets. If a company relies on a single supplier for one of its parts, that company may try to opportunistically charge the company a very high price for that item. At the same time, the company might try to underpay the supplier knowing that the supplier has no other market for that item. Well-written and well-negotiated contracts can head off this potential problem. |
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