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Contract Renegotiation and Rent Re-Redistribution: Who Gets Raked Over the Coals?

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  • Kosnik, Lea
  • Lange, Ian

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.

Suggested Citation

  • Kosnik, Lea & Lange, Ian, 2009. "Contract Renegotiation and Rent Re-Redistribution: Who Gets Raked Over the Coals?," Stirling Economics Discussion Papers 2009-25, University of Stirling, Division of Economics.
    • Handle: RePEc:stl:stledp:2009-25
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    File URL: http://hdl.handle.net/1893/1953
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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.
    2. Di Maria, Corrado & Lange, Ian & van der Werf, Edwin, 2014. "Should we be worried about the green paradox? Announcement effects of the Acid Rain Program," European Economic Review, Elsevier, vol. 69(C), pages 143-162.

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    Keywords

    Acid Rain; Coal Contracts; Contract Renegotiation;

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