Group Relations in Industrial Districts

This paper introduces a notion of intermediate degree of specificity in order to explain the combination between market and non-market coordination mechanisms typically associated with the local industrial systems’ governance structure. More specifically, it is shown that, when investments are in principle imitable, a group of investors may find it profitable to reduce the hold-up risk by making investments that are not specific to their particular relationships with their individual counterparts (taken one by one), but are specific to the set of their relationships with their counterparts (taken as a group). Then, the corresponding grouping form of economic organization is presented as way to reduce the organizational cost of specificity without depressing the ex ante incentives to invest. An independent result of the analysis consists of clarifying to what extent asset specificity can be tought of as creating value.