The Comparative Performance of Long Term Contracts
Abstract: Do discriminating contract structures imply systematic diff erences in performance? While causal mechanisms that explain the type of contract chosen are now well detailed, however, considerably less is known about the performance implications of these choices. To answer this question, I investigate the performance e ffects of coal procurement behavior over two decades by electric utilities in the US. I fi nd prices to be lower under fi xed price contracts, by between 7% to 20% of the total transaction price . Renegotiations are less likely under escalator contracts, but cannot be interpreted as opportunistic under any contract structure. Supplier productivity appears to increase substantially under fixed price contracts. Contract choices appear consistent with a trade-o ff between establishing incentives ex-ante and lowering negotiation costs ex-post, with relationship specifi c investments making such a trade-o ff compelling.
