The Inadequacy of Specificity and Role of Importance in Explaining

It is argued that specificity is inadequate to explain hold-up, as the definition is imprecise as to which party incurs a loss if an asset is redeployed. If both parties to a transaction incur a loss when an asset is redeployed, neither party can credibly hold up the other party. Also the concept does not address expectations. It is the expected loss (not the actual loss) of parties that will drive attempts at hold-up. Therefore focusing on specificity when talking hold-up can be misleading. As a consequence the concept of importance is introduced. The importance of an asset to a firm is the expected loss to the firm if access to the asset is lost. Various determinants of importance are discussed by using a formal framework. Implications are forwarded, and it is argued that the relative importance of the parties has to change for hold-up to occur. One-sided specific investments inherently lead to mutual importance, which mitigates hold-up. Situations without specificity can lead to hold-up if expectations are asymmetric. Lastly, hold-up does not imply a hold-up problem