Contract Renegotiation Research Articles

Renegotiation of Long-Term Contracts with Implicit Incentives

Long-term relationships are often governed by a combination of contracts and implicit agreements. I show that there are welfare gains to writing long-term contracts with the intention of rewriting their terms at a later stage, despite lack of change in the underlying environment. This form of renegotiation is perfectly anticipated as part of an implicit agreement. The benefits of renegotiation are demonstrated in a principal-agent model with observable but noncontractible effort where the players sign long-term output-contingent contracts. Continuation contracts form a basis for punishing deviations from the implicit agreement, but their terms are renegotiated away on the equilibrium path. In the baseline model continuation contracts are designed to lead to unbounded punishments to the principal who is not protected by limited liability. This facilitates the implementation of first best outcomes regardless of the patience of the players and the output technology. In contrast, the first best is not attainable in equilibria without on-path renegotiation when the players are impatient. When the principal is protected by limited liability, continuation contracts can hold either player down to their outside option in equilibrium.

Contract renegotiation by an Italian wastewater utility: Action research to promote effective tariff revision

This article focuses on the process of contract renegotiation by an Italian wastewater utility, commenced with the goal of tariff revision. The main aim of this paper is to identify the conditions that lead to contract renegotiation. It also develops new tools and operations that can facilitate this process. We utilized the action research method that involves organizations in changing situations supported by professional researchers who assume the role of change agents. The study provides some interesting insights on contract management and renegotiation, and highlights conditions that lead to the failure of contract-based regulation.

Long-term natural gas contracts evolution in the changing industry environment

This paper analyzes the determinants of changes in duration of long-term gas export contracts signed in the period from 1963 to 2015 in order to make implications for the gas exporting countries. Our findings from two models suggest that contracts became shorter due to gas market liberalization process triggering in Continental Europe, technological development along gas value chain and increase in LNG fleet size. On the contrary, we found that FOB deals and contracts signed during the global recession period were on average shorter compared to others. The results imply that ongoing technological development along gas value chain, planned gas market liberalization in other significant markets may lead to the further decrease in the contract duration. In this context, gas exporting developing countries may need to take this into account in longer term planning in order to foster gas export revenue stability, demand security and lessening contract renegotiation and enforcement transaction costs.

Who Pays for the Next Wave? The American Welfare State and Responsibility for Flood Risk

In preparing for and responding to natural hazards and disasters, the welfare state establishes a social contract, distributing responsibilities for what will be collectively managed and what will be individually borne. Drawing on archival, interview, and ethnographic data, this article examines the renegotiation of that social contract through the lens of contested efforts to reform the massively indebted US National Flood Insurance Program (NFIP) from 2011 to 2014. In the face of a morally charged debate about deservingness and individual choice, Congress passed legislation that committed to incorporating need-based considerations to the NFIP for the first time. The result defined “deservingness” in terms of ability to pay for risk exposure, qualifying an individualization of responsibility for addressing the problem of flood loss—a problem that might instead demand broader risk sharing, particularly as climate change worsens the threat of flooding.

Renegotiation Costs, Financial Contracting, and Lender Choice

We examine the relation between the cost of debt contract renegotiation and contract design. We use an exogenous shock to the cost of renegotiation to show that as renegotiation costs decline, the maturity of debt contracts lengthens, the initial likelihood of covenant violation increases, and the use of performance pricing provisions becomes less frequent. The evidence indicates that ex-ante allocation of cash flow rights and ex-post reallocation of decision rights through renegotiation are local substitutes, where the preference for one mechanism versus the other depends, at least in part, on renegotiation costs. We also show that the characteristics of contracts that are unaffected by the exogenous shock we examine do not change, suggesting the effects we document are not spurious time trends.

A formal model of firm boundaries and haggling

This study provides a formal model of Williamson’s haggling theory in which transacting parties engage in ex post contract renegotiation. We show that integration can economize bargaining costs but suffers from too much third-party arbitration (i.e., fails in selective intervention).

Debt Covenants, Renegotiation, and Accounting Manipulation

This paper studies the effects of allocating control rights to lenders via debt covenants when managers can sometimes misreport the accounting information on which the covenants are based. When contract renegotiation is exogenously prohibited, including a covenant in the contract is ex ante optimal for the manager because it increases both the probability that poor projects are liquidated and the manager's effort incentive, relative to a contract with no covenant. This is the case although the covenant induces the manager to misreport accounting information to retain control ex post. When the parties can renegotiate the contract, however, the results can flip: Granting the lender more control can then lead to less frequent liquidations of low-quality projects and lower managerial effort incentives and, hence, reduce the manager's ex ante payoff. The key behind these results is not the manager's incentive to misreport per se but her desire to take subsequent actions that conceal the misreporting. The model generates predictions regarding the determinants of accounting-based covenants, and the effects of covenants on misreporting, managerial effort, the frequency of liquidations, and firm value.

Building trust and diversity in patient-centered oncology clinical trials: An integrated model.

Trust is the cornerstone of clinical trial recruitment and retention. Efforts to decrease barriers and increase clinical trial participation among diverse populations have yielded modest results. There is an urgent need to better understand the complex interactions between trust and clinical trial participation. The process of trust-building has been a focus of intense research in the business community. Yet, little has been published about trust in oncology clinical trials or the process of building trust in clinical trials. Both clinical trials and business share common dimensions. Business strategies for building trust may be transferable to the clinical trial setting. This study was conducted to understand and utilize contemporary thinking about building trust to develop an Integrated Model of Trust that incorporates both clinical and business perspectives. A key word-directed literature search of the PubMed, Medline, Cochrane, and Google Search databases for entries dated between 1 January 1985 and 1 September 2015 was conducted to obtain information from which to develop an Integrated Model of Trust. Successful trial participation requires both participants and clinical trial team members to build distinctly different types of interpersonal trust to effect recruitment and retention. They are built under conditions of significant emotional stress and time constraints among people who do not know each other and have never worked together before. Swift Trust and Traditional Trust are sequentially built during the clinical trial process. Swift trust operates during the recruitment and very early active treatment phases of the clinical trial process. Traditional trust is built over time and operates during the active treatment and surveillance stages of clinical trials. The Psychological Contract frames the participants' and clinical trial team members' interpersonal trust relationship. The "terms" of interpersonal trust are negotiated through the psychological contract. Contract renegotiation occurs in response to cyclical changes within the trust relationship throughout trial participation. The Integrated Model of Trust offers a novel framework to interrogate the process by which diverse populations and clinical trial teams build trust. To our knowledge, this is the first model of trust-building in clinical trials that frames trust development through integrated clinical and business perspectives. By focusing on the process, rather than outcomes of trust-building diverse trial participants, clinical trials teams, participants, and cancer centers may be able to better understand, measure, and manage their trust relationships in real time. Ultimately, this may foster increased recruitment and retention of diverse populations to clinical trials.

Changed circumstances and the renegotiation of foreign investment contracts

Today's world is shaped by the processes of globalization and economic liberalization, which dominantly determine the social, economic, environmental and political conditions. As part of these processes, there is an increasing rhetoric about the activities of the state to build a legal system 'ideal for attracting' foreign investment, to establish state institutions in charge of 'attracting foreign investment', and to create a business environment conducive to 'attract' foreign investment. Faced with citizen requests and pressure to create conditions for employment, in initial negotiations with foreign investors state, authorities articulate their willingness to meet these requests. The affirmative stance of governments towards the investments of multinational companies easily can be changed. Once the investment begins, the pledges made by one contracting party to the other may prove to be unrealistic and economically unjustified. The tensions generated between the host state and foreign investors jeopardize the foreign investment contract concluded by the contracting parties. Further fulfillment of contractual obligations from foreign investment contracts will be possible if the contracting parties resolve the resulting conflict through mutual negotiations. Through negotiations, the contracting parties can depreciate the impact of the changed circumstances, including a range of economic, political, legislative and environmental conditions. Initiating negotiations at the right time and conducting them in good faith may lead to a solution. Even if an agreement is not reached, the renegotiation may contribute to a better understanding of contractual partners and redefining the positions of the contracting parties.

Contract Design, Relationship-Specific Investment and Renegotiation

Contract Design, Relationship-Specific Investment and Renegotiation

The renegotiation window: Resource contract renegotiations in the mining industry in Africa from 2000 to 2013

This article explores the question of why countries in Africa increasingly took the decision to review and renegotiate their contracts with international mining companies during the period from 2000 to 2013. A policy window opened for African governments to renegotiate their mining contracts, brought on by the coming together of a problem, a set of policies, and developments in the political stream at the international, regional, and domestic levels. I suggest several explanations to account for these favourable dynamics at all three levels. The fact that African countries were briefly situated within a certain international and regional environment, combined with specific characteristics at the domestic level – including emergence from conflict and/or regime change, and a strong civil society presence calling for companies to sign agreements more in line with country interests – is an important determinant of renegotiation decisions. Cross-country comparisons and detailed case studies from Liberia and the Democratic Republic of Congo provide greater insight into these processes. This iterative, heuristic case-study approach yields greater insight into why some African countries decided to renegotiate their mining contracts. Yet the empirical evidence highlights the limitations to African countries' newfound “window of opportunity.” The recent drop in commodity prices, moreover, suggests that this window has closed and may not reopen for some time.

Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts

We characterize the optimal dynamic contract for a long-term basic service when an uncertain add-on is required later on. Introducing firm risk aversion has two impacts. Profits for the basic service can be backloaded to induce cheaper information revelation for this service: an Income Effect which reduces output distortions. The firm must also bear some risk to induce information revelation for the add-on. This Risk Effect reduces the level of the add-on but hardens information revelation for the basic service. The interaction between these effects has important implications for the dynamics of distortions, contract renegotiation, and the value of incomplete contracts. (JEL D47, D81, D86)

Unfavorable Clauses in International Investment Contracts of Aceh Province, Indonesia

Ideally international investment contracts regulate rights and obligations of parties in balance. In reality, how ever, this cannot be fully achieved by parties. Unfavourable clauses to state/region are existed. These clauses, including but not limited to, choice of foreign/international arbitration abroad, license enrollment/facility, exclusivity of cooperation, long-term contracts, choice of foreign domestic law, waiver of immunity, and confidentiality/intellectual property protection. Understanding the nature of these clauses is important for considerations in negotiation or renegotiation of international investment contracts. How ever, only by understanding these clauses without understanding the whole contract clauses, is not enough for judging balance of each contract. The whole contract clauses includes both unfavorable and favorable have to be compared and analyzed together. This paper, how ever, concentrates mainly on unfavourable clauses to host state/region as a party to international investment contracts.

Periodic review in natural resource contracts

Periodic contract review mechanisms, which are provisions in contracts that formally require parties to meet at particular intervals to review the terms of the contract, are mechanisms that may facilitate the process of negotiating contractual changes to accommodate changing circumstances over the term of extractive industries contracts. Through the review of existing extractive industries agreements, this article considers how such review mechanisms have been incorporated into existing contracts and the use of such mechanisms as a tool for maintaining good relationships between the parties. In addition, the article suggests a new approach to the drafting of these mechanisms by negotiating objective criteria to be incorporated into the contract at the commencement of the contractual relationship in order to facilitate the timing and parameters of contract renegotiation when certain triggers occur. Keywords: Periodic review, natural resources, extractive industries contracts, renegotiation, sustainable development, long-term contracts; hardship

Winners and losers in tolled motorway renegotiations: an empirical evaluation of the Spanish pioneers

This paper evaluates the welfare impact of a tolled motorway contract renegotiation in Spain. The results show that, after renegotiation, both taxpayers and the private concessionaire were better off. However, road users lost out. An agreement leaving road users unaffected, while securing gains for taxpayers and the concessionaire, would have been possible by negotiating a larger reduction in tolls linked to the extension of the contract duration.

A review of emerging trends in global PPP research: analysis and visualization

The last decade has witnessed rapid development in the literature on public---private partnerships (PPPs); however, there have been few attempts to map the global research in this domain. To identify the state of the field and trends in PPP research, the CiteSpace software package was used in this study to conduct a series of content analyses and examine global patterns among publications, including the distribution of core authors and institutions; high-frequency categories and keywords; journal and author contributions; highly cited papers and hot topics of research; and trends with regard to co-author analysis, co-word analysis, co-citation analysis, and particularly cluster analysis. We present all research focuses in a scientometric way and arrive at the following findings. First, the most significant developments and progress in PPP research have occurred primarily in China, the US, the UK and Australia. Second, the existing studies in the field of PPP research focus primarily on Engineering, Business and Economics, and Public Administration. Third, the emerging trends in PPP research have shifted away from concession pricing and concession periods, PPP legislation, procurement management, critical success factors, value for money and PPP project governance toward risk allocation, performance evaluation, renegotiation of concession contracts, real option evaluation and contract management, which are likely to define the new research frontier in the field of PPP research.

Critical renegotiation triggers of European transport concessions

In this paper, we assess the critical factors for the renegotiation of transport infrastructure concessions. We depart from a literature review on the renegotiation of infrastructure concessions and of the main renegotiation triggers and the methodologies used to assess them. By collecting data from a total of 32 transport PPP projects, in 13 European countries, we identified a total of 37 renegotiations. Our findings corroborate the literature in that a country's economic and legal environment has an important impact on the likelihood of renegotiation. The occurrence of elections is shown to have an indirect impact on increasing renegotiations. Furthermore, both the uncertainty associated with developing new PPP projects with budgetary motivations, and the operational stages of long term contracts, play a critical role in contractual renegotiation.

Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence

This paper experimentally studies stipulated damages as a rent-extraction mechanism. We demonstrate that contract renegotiation induces the sellers to propose the lowest stipulated damages and the entrants to offer the highest price more frequently. We show that complete information about the entrant's cost lowers exclusion of high-cost entrants. Unanticipated findings are observed. The majority of sellers make more generous offers than expected. Rent extraction also occurs in renegotiation environments. Our findings from the dictatorial-seller and buyer-entrant communication treatments suggest the presence of social preferences.

Decision-making in organizations: when to delegate and whom to delegate

A production process involves a principal and two privately informed agents. Production requires coordinated decision making. It might be carried in a centralized organization or through delegated contracting in a hierarchical structure. We compare the performance of different organizational structures when renegotiation of initial contracts is possible. We show that delegated contracting always dominates centralization if the downstream contract between the agents is observable. Contracting (resp. control) should be delegated to the agent with the least (resp. most) important information. If downstream contracts are not observable, we obtain a tradeoff between centralization and delegation.

Natural Gas Supply Behavior under Interventionism: The Case of Argentina

We address the causes behind the significant drop in natural gas production in the 2000s in Argentina, starting from a basic supply model that depends on economic incentives, and adding control variables related to different potential explanations such as firm specific (or area specific) behavior and the role of contractual renegotiation of concessions extensions. Results from a panel data of production areas between 2003 and 2013 show that once a basic supply-past production (or reserve) relationship is modeled, other often mentioned effects become non-significant. Chiefly among them are firm specific effects that were used as a central argument for the nationalization of YPF in 2012. Rather, the evidence shows that the observed downcycle conforms to the prediction of a simple model of depressed economic incentives acting upon mature conventional natural gas fields and hindering investment in reserve additions or new technologies. The results are robust to the nationalization of YPF, after which aggregate production continued a downward trend for two years, although are insufficient to capture an ongoing reconfiguration of incentives and risks in the forthcoming transition to shale gas production.