Overview:

The concept of asset specificity is closely related to that of opportunism. Classical economists assume the existence of the "Perfectly rational economic man". For example, two contractually bounded firms will stick to the contract as they are supposed to. However, recent scholars led by Williamson (1985) stressed "bounded rationality" emphasizing the importance of opportunism. Opportunism is defined as a semistrong form of rationality in which actors are assumed to intendedly rational, but only limited so. Williamson argued that the two most important dimensions of business behavior are the problems of imperfect competition and the propensity to act opportunistically. And "asset specificity" becomes an ISSUE because of opportunism.

Originally asset specificity is proposed mainly in a buyer-seller situation, where the buyer is the party that does not hold the specific assets and the seller is the party that holds the specific assets. For example, in Williamson's (1983) model, the hold-up is unilateral: the buyer holds up the seller. However later researchers have realized that asset specificity could be bilateral, or even multi-lateral. For example Joskow (1988) and Klein (1988) noted that even in a traditional buyer-seller situation, the hold up is bilateral because the buyer (the party that does not hold the specific assets) has exit cost associated with time and searching investment if he decides to switch party.

Basically, asset specificity refers to the extent to which you are "Tied in" in a two-way or multiple-way business relationship. For example, learning to speak English, the most universal language of the world, is a highly asset-unspecific investment, since your investment will likely to have equal returns (being able to communicate with others) across different people, locations, time span, and other settings. On the other hand, learning to speak Navajo, a rare ancient American Indian language could be highly asset-specific (human asset-specific, specifically), since your investment return (being able to communicate with others) is high with the few Navajo-speaking people, but almost zero otherwise.