Which statement about transaction cost and task specificity is correct?

Which statement about transaction cost and task specificity is correct?

• A. The more specific the asset, the higher the transaction cost
• B. The more specific the asset, the lower the transaction cost
• C. Transaction costs are independent of asset specificity
• D. Specificity only affects management overhead

Answer: (A)

Asset specificity drives transaction costs because when assets are highly tailored to a particular transaction or partner, the risk of hold-up and misalignment rises. That makes each exchange require more elaborate governance: longer or more detailed contracts, customized performance measures, monitoring, and safeguards to protect the investments. The result is higher transaction costs in the market, since parties spend more on negotiating, enforcing, and coordinating the relationship. In contrast, saying that higher specificity lowers costs or that costs are independent of specificity misses this dynamic. And limiting the effect to management overhead ignores the broader governance and contractual efforts that specificity tends to trigger.

Asset specificity drives transaction costs because when assets are highly tailored to a particular transaction or partner, the risk of hold-up and misalignment rises. That makes each exchange require more elaborate governance: longer or more detailed contracts, customized performance measures, monitoring, and safeguards to protect the investments. The result is higher transaction costs in the market, since parties spend more on negotiating, enforcing, and coordinating the relationship.

In contrast, saying that higher specificity lowers costs or that costs are independent of specificity misses this dynamic. And limiting the effect to management overhead ignores the broader governance and contractual efforts that specificity tends to trigger.