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Asset Specificity and Vertical Integration

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  • Ola Kvaløy

Abstract

Asset specificity is usually considered to be an argument for vertical integration. The main idea is that specificity induces opportunistic behavior, and that vertical integration reduces the cost of preventing opportunism. In this paper I show that asset specificity can be an argument for non‐integration. In a repeated‐game model of self‐enforcing relational contracts, it is shown that when parties are non‐integrated, increasing degrees of asset specificity make it possible to design relational contracts with higher‐powered incentives.

Suggested Citation

  • Ola Kvaløy, 2007. "Asset Specificity and Vertical Integration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 551-572, September.
    • Handle: RePEc:bla:scandj:v:109:y:2007:i:3:p:551-572
    DOI: 10.1111/j.1467-9442.2007.00507.x
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    References listed on IDEAS

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    1. Yeon-Koo Che & Jozsef Sakovics, 2004. "Contractual Remedies to the Holdup Problem: A Dynamic Perspective," Edinburgh School of Economics Discussion Paper Series 100, Edinburgh School of Economics, University of Edinburgh.
    2. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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    Cited by:

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    2. Thiele, Veikko, 2007. "The Demand for Tailored Goods and the Theory of the Firm," MPRA Paper 2471, University Library of Munich, Germany.
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    5. Maija Halonen‐Akatwijuka, 2010. "Organizational Design, Technology and the Boundaries of the Firm," Economica, London School of Economics and Political Science, vol. 77(307), pages 544-564, July.
    6. Christian A. Ruzzier, 2009. "Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered," Harvard Business School Working Papers 09-119, Harvard Business School.

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