Contract Structure and Relationship-Specific Investments: Empirical Evidence from Coal Markets

Abstract

Joskow (1987) examined the importance of specific investments to the contract duration of coal contracts. Since different price-adjust mechanisms are also adopted and provide different incentives during a long-term relationship, this paper examines how the level of specific investments affect the design of coal contract structure, namely the simultaneous choices of contract duration and pricing provision. The empirical results show that, from both the separate and joint estimations, the coal contract duration increases with three types of specific investments mentioned in Williamson (1983). Moreover, the probability to negotiate a cost plus contract, where the buyer agrees to pay the seller’s cost of production, increases with the level of site and dedicated asset specificities. When more physical asset specificity is presented, the probability to negotiate a contract with fixed price is greater.