Table of Contents

Regulation, Deregulation, Reregulation

Regulation, Deregulation, Reregulation

Institutional Perspectives

Advances in New Institutional Analysis series

Edited by Claude Ménard and Michel Ghertman

Building on Oliver Williamson’s original analysis, the contributors introduce new ideas, different perspectives and provide tools for better understanding changes in the approach to regulation, the reform of public utilities, and the complex problems of governance. They draw largely upon a transaction cost approach, highlighting the challenges faced by major economic sectors and identifying critical flaws in prevailing views on regulation. Deeply rooted in sector analysis, the book conveys a central message of new institutional economics: that theory should be continuously confronted by facts, and reformed or revolutionized accordingly.

Chapter 13: Adaptation in Long-term Exchange Relations: Evidence from Electricity Marketing Contracts

Dean V. Williamson

Subjects: economics and finance, institutional economics


Dean V. Williamson INTRODUCTION This research takes up an old, enduring question about what contracting parties can achieve in a long-term contract that they cannot achieve by a sequence of short-term contracts.1 In the environment examined here, the action depends on the role of renegotiation in enabling contracting parties to adapt terms of exchange over time to changing conditions.2 As a matter of course, short-term contracts enable parties to renegotiate and adapt terms of exchange after a short term (Myers, 1977: 158; Williamson, 1971: 116). Thus, if adaptation over the long term is important, why would parties ever commit to long terms? One part of the answer advanced here depends on ‘friction’: long-term contracts allow parties to program fewer, rather than more, costly instances of renegotiation. A familiar tradeoff obtains between enabling flexibility in contractual relations and the costs of supporting that flexibility: a sequence of short-term contracts may afford greater flexibility, but programming a sequence of short-term contracts also entails programming a sequence of costly renegotiations (Masten and Crocker, 1985; Crocker and Masten, 1988). Managing trade-offs between flexibility and renegotiation suggests that ‘efficient adaptation’ can be an interesting economic problem (Crocker and Masten, 1991), but that is just one consideration in a much larger contracting problem. The first-order action pertains to investment incentives (Williamson, 1971: 116). In the environment examined here, adaptation may involve expanding, withdrawing, or tuning up production capacity over the course of (possibly) long-term exchange. A difficulty is that one party’s decision to expand, withdraw, or...

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