Organizations and Markets

Plasticity and Asset Specificity

7 June 2007 at 10:44 pm Peter G. Klein 7 comments

| Peter Klein |

A reader asks what I think of Alchian and Woodward’s concept of “plasticity” and how it relates to Williamson’s notion of asset specificity.

The term was introduced in “The Firm is Dead: Long Live the Firm” (Journal of Economic Literature, 1988), Armen Alchian and Susan Woodward’s thoughtful review of Williamson’s Economic Institutions of Capitalism. They define plasticity as the range of uses to which an asset may be put. “We call resources or investment ‘plastic’ to indicate that there is a wide range of discretionary, legitimate decisions within which the user may choose” (p. 69). In the Barzelian language favored on this blog, plasticity can be interpreted as the number of attributes — realized or potential — that assets possess. Trucks and copy machines are highly plastic. So are R&D labs, in the sense that they can be used to pursue long- or short-term objectives, to satisfy clients’ objectives or to maximize the researchers’ utility, and so on. Steel mills are implastic because they can be used to make steel and little else.

Alchian and Woodward introduce the term in an attempt to integrate the concepts of moral hazard and holdup into a single, unified theory of opportunism. Holdup is a kind of post-contractual opportunism that results from asset specificity, the degree to which the value of resources depends on their use in particular contractual relationships. Moral hazard is another kind of post-contractual opportunism that results from plasticity plus monitoring costs. Williamson, argue Alchian and Woodward, does not distinguish clearly between these different sources of opportunistic behavior. Resources can be implastic but specific (as in an a coal-burning electric plant next to a coal mine), so that holdup is a problem but agency costs are negligible. A delivery truck, by contrast, is highly plastic, so that relations between owners and operators must be governed by strong incentive contracts, but there is little opportunity for holdup (and hence no reason, other things equal, for vertical integration — but see various papers by Jackson Nickerson, like this one, for details about trucking).

Personally, I find the distinction between “use specificity” and “user specificity” more straightforward. Asset specificity refers not to an asset that is specific to a particular use, but to an asset that is specific to a particular user, or to a particular economic relationship. (Hence the term “relationship-specific investments” is probably clearer than the term “asset specificity.”) Imagine a machine that makes a particular kind of screw. The machine may be highly specialized, useful only for making that particular screw, so that it has a high degree of use specificity. However, if there are lots of customers seeking to buy that kind of screw, than the machine is not a relationship-specific asset, meaning that its value is not tied to the actions of any particular buyer. Here there is no asset specificity of the kind that would lead to vertical integration.

Entry filed under: - Klein -, New Institutional Economics, Theory of the Firm.