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Contract Renegotiation and Rent Re-Redistribution: 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. This law altered the regulation of emissions of sulfur dioxide from coal-fired electric power plants, initiating a tradable permit system for a subset of coal-fired power plants which had previously been unregulated at the federal level. Contracts are divided into two categories, those that were renegotiated following the shock and those that were not and their characteristics are used to determine how they influence whether or not a contract was ultimately renegotiated. The number of years until the contract expires, a larger allowable sulfur content upper bound for plants regulated immediately by the tradable permit scheme, and the minimum quantity are all associated with a contract being renegotiated.

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Paper provided by University of Stirling, Division of Economics in its series Stirling Economics Discussion Papers with number 2009-25.

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Date of creation: Dec 2009
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Handle: RePEc:stl:stledp:2009-25
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Division of Economics, University of Stirling, Stirling, Scotland FK9 4LA

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Web page: http://www.econ.stir.ac.uk/

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Keywords: Acid Rain; Coal Contracts; Contract Renegotiation;

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  7. Anne Neumann & Christian von Hirschhausen, 2006. "Long-Term Contracts and Asset Specificity Revisited: An Empirical Analysis of Producer-Importer Relations in the Natural Gas Industry," Discussion Papers of DIW Berlin 552, DIW Berlin, German Institute for Economic Research.
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  13. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, November.
    • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894, November.
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  15. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
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  22. Burtraw, Dallas & Palmer, Karen & Cropper, Maureen & Carlson, Curtis, 1998. "Sulfur-Dioxide Control By Electric Utilities: What Are the Gains from Trade?," Discussion Papers dp-98-44-rev, Resources For the Future.
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Cited by:

  1. Corrado Di Maria & Ian A. Lange & Edwin van der Werf, 2012. "Should we be Worried about the Green Paradox? Announcement Effects of the Acid Rain Program," CESifo Working Paper Series 3829, CESifo Group Munich.

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