The Economics of Adaptation and Long-term Relationships
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The Economics of Adaptation and Long-term Relationships

Dean V. Williamson

Do institutions matter in economic theory? Or is the economic analysis of institutions a distraction from the most important action? Indeed, does Vernon Smith’s notion of the “institution-free core” of formal economic theory encompass that most important action? To explore this question, this book opens with an informal tour of the economics of system design out of which an economics of adaptation ultimately emerged. The book then offers explorations, via the application of the economics of adaptation in both law and economics relating to how parties manage relationships within the firm, within the context of long-term contracts, and, most vividly, within the context of antitrust conspiracy.
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Chapter 4: Adaptation in long-term exchange relations: evidence of the complementarity and ancillarity of dimensions of electricity marketing contracts

Dean V. Williamson


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 in the ancillarity of other instruments that are consistent with efficient adaptation being an important economic problem.

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