Regulation and Contract Design: The Impact of Relationship Specific Investment

A primary explanation for variation in contract structure is the extent to which contracting parties make investments specific to their transaction. Investment decisions are typically endogenous in contract choice, however, frustrating attempts at causal verification. I analyze the impact of a major environmental regulation, the Clean Air Act Amendment of 1990, on coal procurement strategies of U.S. utilities. I exploit a key feature of the Amendment's design to define a difference-in-difference model that is arguably less susceptible to endogeneity concerns. I find wide support for the theoretical prediction: reduced specificity leads to shorter length, fixed price contracts.