Testing Williamson’s Theory on Transaction-Specific Governance Structures: Evidence from Electricity Markets

Journal of Applied Economics, Vol. 11, No. 2, pp. 355-372, November 2008

Posted: 21 Feb 2010

See all articles by Laura Onofri

Laura Onofri

Fondazione Eni Enrico Mattei (FEEM)

Date Written: November 1, 2008

Abstract

Long term contracts increase the hazard of ex post maladaptation, creating demand for processes that enable adaptation over the course of long-term exchange. Enabling adaptation, however, may diminish the effectiveness of the long-term contracts, designed as prima facie hold-up remedies. Following Joskow (1987), we attempt to empirically capture the positive relationship between physical asset specificity and the duration of long-term contracts between California electricity generators. In addition, following Masten and Crocker (1985), we try to measure the effect of legal provisions on contract duration and interpret them as efficient instruments for providing flexibility in long-term relationships. The more important the investment in relationship-specific assets, the longer the contractual duration. However, parties mitigate long-term contract inflexibility, based on ex ante bargained terms and conditions, with provisions that allow for contingent adaptation. Our empirical results provide support for the hypothesised relationships under different model specifications and alternative estimation techniques.

Keywords: electricity long-term contracts, idiosyncratic relations, asset specificity, efficient

JEL Classification: C2, K23, L140

Suggested Citation

Onofri, Laura, Testing Williamson’s Theory on Transaction-Specific Governance Structures: Evidence from Electricity Markets (November 1, 2008). Journal of Applied Economics, Vol. 11, No. 2, pp. 355-372, November 2008, Available at SSRN: https://ssrn.com/abstract=1555830

Laura Onofri (Contact Author)

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

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