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Early contract renegotiation: An analysis of U.S. labor contracts from 1970 to 1995

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  • Robert Rich
  • Joseph Tracy

Abstract

This paper examines the ex post flexibility of U.S. labor contracts during the 1970-95 period by investigating whether unanticipated changes in inflation increase the likelihood of a contract being renegotiated prior to its expiration. We find strong empirical support for this hypothesis. Specifically, our results indicate that renegotiations are triggered principally by large and infrequent price shocks of either sign. When combined with evidence that ex ante contract durations are shorter during episodes of increased inflation uncertainty, our results suggest that these contracts are flexible both ex ante and ex post to changes in the evolution of inflation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 521.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:521

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Related research

Keywords: Labor contract ; Inflation (Finance) ; Uncertainty;

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References

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  1. Christofides, Louis N, 1985. "The Impact of Controls on Wage Contract Duration," Economic Journal, Royal Economic Society, vol. 95(377), pages 161-68, March.
  2. Christofides, L.N., 1989. "The Interaction Between Indexation, Contract Duration And Non-Contengent Wage Adjustment," Working Papers 1989-13, University of Guelph, Department of Economics and Finance.
  3. Hart, O. & Moore, J., 1989. "Default And Renegotiation: A Dynamic Model Of Debt," Working papers 520, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Dye, Ronald A, 1985. "Optimal Length of Labor Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 251-70, February.
  5. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
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  7. Nicolae Garleanu & Jeffrey Zwiebel, 2009. "Design and Renegotiation of Debt Covenants," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 749-781, February.
  8. Robert Rich & Joseph Tracy, 2004. "Uncertainty and Labor Contract Durations," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 270-287, February.
  9. Leif Danziger & Shoshana Neuman, 2005. "Delays in Renewal of Labor Contracts: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 341-372, April.
  10. Canzoneri, Matthew B., 1980. "Labor contracts and monetary policy," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 241-255, April.
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  12. repec:nbr:nberre:0126 is not listed on IDEAS
  13. Danziger, Leif, 1988. "Real Shocks, Efficient Risk Sharing, and the Duration of Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 435-40, May.
  14. Antonio Estache & J.L. Guasch & A. Iimi & Lourdes Trujillo, 2008. "Multidimentionality and Renegotiation: Evidence from Transport-Sector PPP Transaction in Latin America," Working Papers ECARES 2008_021, ULB -- Universite Libre de Bruxelles.
  15. Shavell, Steven, 1984. "The Design of Contracts and Remedies for Breach," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 121-48, February.
  16. Roberts, Michael R. & Sufi, Amir, 2009. "Renegotiation of financial contracts: Evidence from private credit agreements," Journal of Financial Economics, Elsevier, vol. 93(2), pages 159-184, August.
  17. Peter Cramton & Joseph S. Tracy, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," Papers of Peter Cramton 92aer, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  18. Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
  19. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  20. Christofides, L. N. & Wilton, D. A., 1983. "The determinants of contract length : An empirical analysis based on Canadian micro data," Journal of Monetary Economics, Elsevier, vol. 12(2), pages 309-319.
  21. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-81, November.
  22. Harris, Milton & Holmstrom, Bengt, 1987. "On the Duration of Agreements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 389-406, June.
  23. Huberman, Gur & Kahn, Charles M, 1988. "Limited Contract Enforcement and Strategic Renegotiation," American Economic Review, American Economic Association, vol. 78(3), pages 471-84, June.
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