Tuesday, October 07, 2008

Asset Specificity

While returning from an enjoyable conference hosted by the Bruno Leoni Institute in Sestri Levante Italy, I watched a comedy - Baby Mama - about a businesswoman who hires a surrogate mother. The movie is of average quality (although that's not bad on an international flight) but it illustrates the importance of asset specificity and post-contractual opportunism.

Once the "investments" are made, both party's assets have subustantially less value in market exchange due to the specificity involved. As a result, costly bargaining (and in this case hilarity) ensues.

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