Laura Onofri (University of Venice Ca Foscari and Fondazione ENI Enrico Mattei)
Abstract
Long term contracts increase the hazard of ex post maladaptation, creating demand for processes that enable adaptation over the course of long-term exchange. Enabling adaptation, however, may diminish the effectiveness of the long-term contracts, designed as prima facie hold-up remedies. Following Joskow (1987), we attempt to empirically capture the positive relationship between physical asset specificity and the duration of long-term contracts between California electricity generators. In addition, following Masten and Crocker (1985), we try to measure the effect of legal provisions on contract duration and interpret them as efficient instruments for providing flexibility in long-term relationships. The more important the investment in relationship-specific assets, the longer the contractual duration. However, parties mitigate long-term contract inflexibility, based on ex ante bargained terms and conditions, with provisions that allow for contingent adaptation. Our empirical results provide support for the hypothesised relationships under different model specifications and alternative estimation techniques.
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Volume (Year): XI (2008) Issue (Month): (November) Pages: 355-372 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation