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

Dr Ian Lange, University of Stirling

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 and their characteristics are used to determine how they influence whether or not a 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.