Contract renegotiation and rent re-distribution: Who gets raked over the coals?

Abstract

Policy shocks affect the rent distribution in long-term contracts, which can lead to such contracts being renegotiated. We seek an understanding of what aspects of contract design, in the face of a substantial policy shock, affect the propensity to renegotiate. We test our hypotheses using data on U.S. coal contracts after the policy shock of the 1990 Clean Air Act Amendments. Contracts are divided into two categories, those that were renegotiated following the shock and those that were not. Characteristics of the contract are used to explain whether or not the contract was ultimately renegotiated. Results provide guidance on rent re-distribution and contract renegotiation more generally and are applicable to contemporary policy issues such as climate change legislation.JEL Codes: L51, Q48, D23, K32

Should we be worried about the green paradox? Announcement effects of the Acid Rain Program

“…Using data on all transactions -see column (4) -reveals that overall mandatory Phase I plants decreased their sulfur intensity relative to non-Phase I plants starting from 1993. This is line with the evidence suggesting that several Phase I plants aggressively renegotiated their long-term contracts in anticipation of the commencement of the ARP, in order to reduce the sulfur-content of the coal they would receive in the future (Kosnik and Lange, 2011).…”