Specific Versus General Investments

Specific Versus General Investments^[11]

Workers are more vulnerable to holdups when they have job-specific human capital. Similarly, capitalists can more easily be exploited when their investments have but one use. Imagine you agree to set up a manufacturing plant to make automobile parts for Hondas. Once you have built the plant, how much power does Honda have over you? If you could easily retool to make auto parts for, say, Ford, then you’re not desperately dependent upon Honda. If, however, your investment is lost if Honda no longer wants your parts, then Honda can hold you up because you are dependent upon it. If your investment will have only one use, you need to guarantee, probably through long-term contracts, that you will always be able to sell your wares. If, however, your investment has many uses, then you can take a less cautious attitude since you’re not artificially dependent upon your old partner.

^[11]See Watson (2002), 201–205.