Adaptation in long-term exchange relations: evidence of the complementarity and ancillarity of dimensions of electricity marketing contracts

Abstract

The research illuminates the role of financial structure (debt or equity financing) and contract renegotiation in enabling efficient adaptation over the course of long-term exchange. I provide evidence from a dataset of electricity marketing contracts about how electricity generators and electricity “marketers” use four instruments – contract duration, risk-sharing schemes, financial structure, and veto provisions – to channel investment incentives and to address both programmable and unprogrammable demands for contract adjustments. The empirical results demonstrate that veto provisions support long-term contracts by investing the governance of long-term relationships with flexibility. Further, the ancillarity of other instruments is consistent with efficient adaptation being an important economic problem.