reconciling social welfare agent profits and consumer payments in electricity pools under a common condition called profit suboptimality market equilibrium cannot be reached in electricity pools in other words no system marginal price exists for which the profit driven independent generators would self schedule to levels that exactly meet the demand on the other hand although a centrally imposed generation schedule satisfies power balance it may force some agents to operate at a profit below what they could achieve under self scheduling this paper examines these incompatible goals and proposes a conflict resolution scheme based on the notion of generalized uplift functions these functions are defined such that they i change the offered generation cost characteristics so as to increase the system marginal price thus forcing the consumers to compensate the generators for part of their combined loss of profit ii execute an equitable transfer of revenues among the generators so that these also participate in any loss of profit compensation iii ensure market equilibrium at the centralized minimum cost solution and iv ensure that the net sum of the uplifts adds up to zero

are health insurance markets competitive to gauge the competitiveness of the group health insurance industry i investigate whether health insurers charge higher premiums ceteris paribus to more profitable firms such direct price discrimination is feasible only in imperfectly competitive settings using a proprietary national database of health plans offered by a sample of large multisite firms from 1998 2005 i find firms with positive profit shocks subsequently face higher premium growth even for the same health plans moreover within a given firm those sites located in concentrated insurance markets experience the greatest premium increases the findings suggest health care insurers are exercising market power in an increasing number of geographic markets

gathering information before signing a contract a screening perspective a principal has to choose among several agents to fulfill a task and then provide the right incentives to perform it agents do not a priori know how competent they are for the task it is shown that the principal should propose a contract that leads the agents to gather information about their competence prior to signing the contract this insight is in sharp contrast with cremer and khalil j cremer f khalil gathering information before signing a contract american economic review 82 1992 566 578 who consider a setup with one agent or alternatively a setup with several agents in which the private information commonly applies to all agents it emerges because in our private value setup information acquisition accompanied by a proper screening device increases the chance that the principal will pick a competent agent c 2006 elsevier b v all rights reserved

natural resources curse or blessing are natural resources a curse or a blessing the empirical evidence suggests that either outcome is possible this paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources these include that a resource bonanza induces appreciation of the real exchange rate deindustrialization and bad growth prospects and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law corruption presidential democracies and underdeveloped financial systems another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad induces corruption especially in nondemocratic countries and keeps in place bad policies finally resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets the survey also offers some welfare based fiscal rules for harnessing resource windfalls in developed and developing economies

gathering imperfect information before signing a contract i study information gathering for rent seeking purposes in contracting in my model an agent learns his payoff type only after accepting a contract but can at costs acquire imperfect information while deliberating whether to accept i show that the principal deters the acquisition if and only if the costs are high the result stands in contrast to a finding by cremer and khalil 1992 who demonstrate that the acquisition of perfect information will always be deterred a key insight is that the case of imperfect information is an instance of a sequential screening problem

facilitating consumer learning in insurance markets what are the welfare effects we model a monopoly insurance market where consumers can learn their accident risks at a cost c we then ask what are the welfare effects of a policy that reduces c if c is sufficiently small c c marginally reducing c hurts the insurer and weakly benefits the consumer finally a reduction in c that is successful meaning that the consumer gathers information after the reduction but not before it can hurt both parties this article is protected by copyright all rights reserved

when does it pay to get informed a repeated principal agent problem where both sides start out symmetrically uninformed about a productivity related parameter and where the principal has the option to costlessly learn this parameter is analyzed typically the principal delays the acquisition of information to avoid costly signaling if the learning decision of the principal is observable by the agent the expected delay is longer than if it is unobservable the discrepancy is due to the ability of the principal to avoid costly signaling when he is known to be uninformed

consistent and robust delimitation of price zones under uncertainty with an application to central western europe abstract new and alternative delimitations of price zones for central western europe cwe might constitute a mid term solution to cope with the increasing congestion in the electricity transmission grids the significantly growing infeed from renewable energy sources puts more and more pressure on the grid and emphasizes the need for improved congestion management thus a new delimitation of price zones is frequently considered in current discussions and research the present paper applies a novel hierarchical cluster algorithm that clusters locational marginal prices and weights nodes depending on their demand and supply situation to identify possible new price zone configurations pzcs the algorithm is applied in a scenario analysis of six scenarios reflecting main drivers that influence the future development of european electricity markets in line with the trilemma of energy policy targets robustness of the new configuration is an important criterion for price zone configurations according to the european guideline on capacity allocation and congestion management cacm therefore a robust price zone configuration is computed taking into account all the six individual scenarios results show that shape size and price variations of price zones on the one hand strongly depend on the individual scenario on the other hand the identified robust configuration is shown to outperform other configurations particularly also the current price zone configuration in cwe

aggregation of information in large cournot markets consider a homogeneous product market where firms have private information about an uncertain demand parameter and compete in quantities we examine the convergence properties of bayesian cournot equilibria as the economy is replicated and conclude that large cournot or almost competitive markets do not aggregate information efficiently except possibly when the production technology exhibits constant returns to scale even in a competitive market there is a welfare loss with respect to the first best outcome due to incomplete information in general nevertheless a competitive market is efficient taking as given the decentralized private information structure of the economy endogenous and costly information acquisition is examined and seen to imply that the market outcome always falls short of the first best level with decreasing returns to scale the results are also shown to be robust to the addition of extra rounds of competition which allows firms to use the information revealed by past prices explicit closed form solutions yielding comparative static results are obtained for models characterized by quadratic payoffs and affine information structures

can markets stimulate rights on the alienability of legal claims the alienability of legal claims holds the promise of increasing access to justice and fostering development of law i develop a principal agent framework where litigation funders provide expertise in reducing uncertainty in agents disutility of production the model leads to the counterintuitive prediction that litigation funders prefer cases with novel issues and social surplus is positively correlated with legal uncertainty consistent with the model court backlog court expenditures and a slowing in average time to completion are associated with third party funding cases with third party funding receive more citations and are reversed less often than comparable cases without such arrangements

optimal auctions with information acquisition this paper studies optimal auction design in a private value setting with endogenous information acquisition first we develop a general framework for modeling information acquisition when a seller wants to sell an object to one of several potential buyers who can each gather information about their valuations prior to participation we then show that under certain conditions standard auctions with a reserve price remain optimal but the optimal reserve price lies between the mean valuation and the standard reserve price in myerson 1981 we provide sucient conditions under which the value of information to the seller is positive and also characterize the necessary and sucient conditions under which equilibrium information acquisition in private value auctions is socially excessive the key to the analysis is the insight that buyer incentives to acquire information become stronger as the reserve price moves toward the mean valuation

evaluation of alternatives for power system coordination and pooling in a competitive environment the paper defines and classifies essential issues that relate the need for electric power system coordination with the increasing development of competition principles are formulated and a coordination model and a market structure are proposed emphasizing the need for economic dispatch in the wholesale market a detailed comparison is made of the market and pooling implementations developed in argentina and chile countries that have pioneered the creation of competitive markets in the electric energy sector an evaluation of strengths and weaknesses of those two implementations is included

two price zones for the german electricity market market implications and distributional effects abstract we discuss the implications of two price zones i e one northern and one southern bidding area on the german electricity market in the northern zone continuous increases in capacity with low variable costs cause large regional supply surpluses in the market dispatch while in the southern zone conventional capacity decreases as the spatial imbalance of supply and load is increasing the current single bidding area more often results in technically infeasible market results requiring curative congestion management measures there is an ongoing discussion about the potential effects of introducing bidding zones in germany this paper applies an electricity sector model with network representation to analyze the system implications and the distributional effects of two bidding zones in the german electricity system in 2012 and 2015 results show a modest decrease in cross zonal re dispatch levels particularly in 2015 however overall network congestion and re dispatch levels increase in 2015 and also remain on a high level for two bidding zones results are very sensitive to more than two bidding zones and additional line investments illustrating the challenge to define stable price zones in a dynamic setting with two bidding areas prices in the model results increase in the southern zone and decrease in the northern zone the average price deviation grows from 0 4eur mwh in 2012 to 1 7eur mwh in 2015 with absolute values being significantly higher in hours when price differences occur stakeholders within zones are exposed to the price deviations to a different extent distributional effects are surprisingly small compared to the wholesale price or different network charges

information gathering transaction costs and the property rights approach the property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives while bargaining is ex post efficient in contrast transaction cost economics emphasizes ex post inefficiencies in the present paper a party may invest and acquire private information about the default payoff that it can realize on its own inefficient rent seeking can overturn prominent implications of the property rights theory in particular ownership by party b may be optimal even though only the indispensable party a makes an investment decision

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

evolution toward standardized market design the evolution toward the standardized market design smd is presented in this paper with references to the market developments in new zealand australia pjm iso ne and ercot in the development of market designs two main objectives market liquidity facilitating bilateral trading and pricing efficiency facilitating congestion management have been pursued the efforts to balance the seemingly conflicting objectives led to most markets designed with a uniform or zonal pricing model introduction of locational marginal pricing and evolution of transmission rights from physical to financial form made it possible to harmonize the potentially conflicting goals in a market design the close coupling between energy and ancillary services requires that markets for these commodities be carefully coordinated different operational practices and reliability standard requirements have led to major differences in ancillary service market designs

contracts with endogenous information abstract i study covert information acquisition and reporting in a principal agent problem allowing for general technologies of information acquisition when posteriors satisfy two dimensional versions of the standard first order stochastic dominance and concavity convexity of the distribution function conditions a first order approach is justified under the same conditions informativeness and riskiness of reports are equivalent high powered contracts that make the agent s informational rents more risky are used to increase incentives for information acquisition insensitive contracts are used to reduce incentives for information gathering the value of information to the agent is always positive the value of information to the principal is ambiguous

mechanism design by an informed principal private values with transferable utility we provide a solution to the informed principal problem in the independent private values setting with monetary transfers the principal s private information creates signaling considerations that may distort the implemented allocation we show that there is no distortion all principal types implement an allocation that is optimal for the principal ex ante before he she learns his her type as an application we consider settings with linear utility for bilateral exchange in which the principal is one of the traders the solution is a combination of a participation fee a buy out option for the principal and a resale stage with posted prices

auctions and information acquisition sealed bid or dynamic formats the value of an asset is generally not known a priori and it requires costly investments to be discovered in such contexts with endogenous information acquisition which selling procedure generates more revenues we show that dynamic formats such as ascending price or multistage auctions perform better than their static counterpart this is because dynamic formats allow bidders to observe the number of competitors left throughout the selling procedure thus even if competition appears strong ex ante it may turn out to be weak along the dynamic format thereby making the option to acquire information valuable this very possibility also induces the bidders to stay longer in the auction just to learn about the state of competition both effects boost revenues and our analysis provides a rationale for using dynamic formats rather than sealed bid ones

linking the insights of smith marx young and hirschman on the division of labour implications for economic integration and uneven development this article distinguishes between two types of division of labour discussed by smith the final product specialisation type has been adopted as the basis of mainstream trade models that champion the benefits of free trade the division of production operations type can be extended through the works of marx transition to modern industry based on forms of manufacture young industrial differentiation and hirschman linkages through this some countries started reaping more benefits from increasing returns engendering incipient uneven development that aggravates under unrestricted economic integration between them and the trailing countries in the modern era the leading countries trans national corporations have further shaped the international division of production operations resulting in different forms of enclave development when their activities are unregulated under recently reached multi lateral agreements that limit the use of subsidies and investment measures and strengthen the protection of intellectual property rights uneven development would be sustained some future research directions are considered

dcopf based marginal loss pricing with enhanced power flow accuracy by using matrix loss distribution on current days many of the power markets are adopting the practice of marginal loss pricing the dc optimal power flow dcopf model is still mostly used for the purpose of market clearing owing to its simplicity robustness and higher speed of convergence within the dcopf framework transmission line losses are represented as additional external loads on the system in the classical dcopf model of marginal loss pricing as implemented in the new england market the aggregated network loss is distributed over the system nodes in a fixed ratio to gain more design flexibility in the distribution of system losses a matrix loss distribution mld framework is developed in this paper maintaining compatibility with financial transmission rights in mld each individual line is considered separately for the purpose of loss distribution the ratio in which the power loss in a certain line is distributed can be different from that in which the power loss in another line is distributed the additional design flexibility thus obtained assists in making a more accurate representation of the power flow the benefit of mld is illustrated through a case study an energy reference independent application of mld is also suggested

on renegotiation design a central concern of contract theory is to investigate departures from the first best paradigm in which rational agents could in principle achieve unrestrained efficiency through complete long term contingent contracts in order to take into account some of the observed limitations in real life contracts attention has been paid to informational problems one focus has been on asymmetries of information between contractors adverse selection and moral hazard have been used for example to analyze insurance problems labor contracts managerial incentives regulation of monopolies vertical restraints or the financial structure of firms see for example hartholmstrom 1987 for a survey of these issues attention has also been devoted to private information shared by the parties but unavailable to outsiders like courts that is observable but unverifiable information asymmetries of information between contractors introduce constraints which indeed most often prevent to achieve first best efficiency unfortunately this paradigm involves technical difficulties which explains why most contributions focus on unidimensional asymmetries and may leave some undeterminacies as to the form of optimal contracts e g if there are more than one asymmetry or the size of the inetliciencies there may for instance exist several equilibria which are more or less inefficient the last paradigm observable but unverifiable information is technically more convenient what is not clear however is the extent to which the presence of unverifiable information may prevent achieving first best

optimal bidding of a group of wind farms in day ahead markets through an external agent in deregulated electricity markets producers offer their energy to the day ahead market as the subsidies for renewable producers are becoming lower and lower they have to adapt to market prices this paper models the energy trading in the day ahead market for wind power producers different strategies are proposed for this purpose 1 several wind farms offering their energy separately to the day ahead market 2 the same strategy as in 1 but compensating the imbalance among different wind farms and 3 a joint offer involving several wind farms through an external agent in order to minimize the imbalances between the offer and the final power generation the strategies are modeled with stochastic mixed integer linear programming and conditional value at risk is used to consider the risk assessment the expected profit including risk aversion is maximized for each wind power producer and for the set of wind power producers in the case of a joint offer a comparison of the different cases is described in detail in a case study and relevant conclusions are provided

selling formats for search goods the paper offers a comparative analysis of different ways to sell products selling formats when buyers incur evaluation costs since these costs are sunk at the moment of trade buyers may refrain from incurring them for fear of later opportunism on the part of sellers it is found that the use of many common selling formats can be explained in terms of their ability to alleviate this problem specifically i explain price advertising seller colocation and bargaining the theory explains much of the divergence in retail trading institutions and leads to several testable predictions

endogenous information and stochastic contracts abstract a growing literature analyzes revenue maximizing contracts for situations in which agents can acquire private information before they decide whether to join the contract it is conjectured that the results also apply to the more natural scenario where information can be acquired either before or after signing this paper shows that in fact the latter scenario is more favorable for the principal using stochastic contracts she can induce information acquisition with some probability and yet appropriate the generated surplus

the value of information in efficient risk sharing arrangements suppose that agents share risks in competitive markets we show that better information makes everyone worse off if the economy has a representative agent that is the economy s demand for state contingent consumption equals the demand of a hypothetical agent who owns all the economy s wealth the representative agent moreover is normatively unrepresentative although each agent dislikes information the representative agent is indifferent although we emphasize pure exchange our results imply that a representative agent model might seriously misstate the welfare effects of improved information in an economy with production and risk sharing even if it performs well otherwise

systems integration a core capability of the modern corporation many of the world s leading firms are developing a new model of industrial organization based on systems integration rather than performing all productive tasks in house companies are building the capabilities to design and integrate systems while managing networks of component and subsystem suppliers this article illustrates how systems integration evolved from its military engineering based origins in the 1940s and 1950s to a modern day strategic capability across a wide variety of sectors taking a resource based view of the firm the article shows how systems integration capabilities underpin the way high technology companies compete by moving selectively up and downstream in the marketplace through the simultaneous twin processes of vertical integration and disintegration systems integrators of capital goods move downstream into service intensive offerings to expand revenue streams and increase profitability by contrast producers of high volume components and consumer goods use systems integration capabilities to exploit upstream relationships with input suppliers in both cases strategic options and capabilities are shaped by the life cycle of each product the article develops a clearer understanding of systems integration arguing that it now represents a core capability of the modern high technology corporation

gathering information before signing a contract after being offered a contract an agent has the possibility to observe the state of nature this enables him to refuse the contract in unfavorable states but burdens him with an observation cost the authors show that the principal offers a contract in which the agent has no incentive to observe the state of nature and they explore its terms later they show that the principal finds it profitable to organize competition between several agents even though he has monopoly power and can push a single agent down to his reservation utility copyright 1992 by american economic association

specific investments flexible adaptation and requirement contracts i introduction in bilateral procurement relationships ex post opportunism may cause underinvestment in relationship specific investments as is shown by klein et al 1978 and williamson 1985 in such situations long term contracts can help to mitigate this so called hold up problem in a world of positive transaction costs long term contracts are necessarily incomplete 1 an inflexible incomplete contract may lead to ex post maladaptation in the presence of uncertainty as in williamson 1985 therefore a transaction cost economizing contract needs to provide both incentives for efficient relationship specific investments and flexibility for efficient adaptation 2 in a simple hold up model with contractible cost related variables i show that efficient adaptation and investments can be achieved through a requirement contract which gives the buyer the right to decide on how much to buy ex post and contains a price provision with a two part tariff structure including a fixed component and a unit charge that may vary with quantities and cost related variables this result provides a formal explanation of contractual arrangements observed in vertical procurement relationships formally my result can be viewed as an extension of williamson s 1983 hostage model in which only the seller makes investments the procurement quantity is fixed and there is no cost uncertainty my result is also related to previous formal studies on the take or pay contracts as in hubbard and weiner 1986 crocker and masten 1988 and masten 1988 in a simpler model without cost uncertainty and specific investments they show that a unilateral options contract with a take or pay feature gives the buyer the right incentives to make efficient quantity decisions particularly crocker and masten 1988 and masten 1988 emphasize the take or pay contract s ability to induce efficient adaptation another related paper is by bos 1996 who shows that when the production cost is contractible a target cost pricing contract that requires the seller to share a portion of the cost overrun can achieve the first best outcome the rest of the article is organized as follows section ii provides the background of the issue studied section iii lays out the model and characterizes the first best benchmark section iv derives the optimal contract section v concludes ii background a growing recent literature has attempted to find contractual solutions to the hold up problem most of the papers in the literature use hart and moore s 1988 classical model or its variation in that model there are two risk neutral firms a buyer and a seller of an intermediate good each firm can before production make a relationship specific investment to enhance the future value of the good in the case of the buyer or to reduce the production cost of the good in the case of the seller neither the investments nor the value nor the cost of the intermediate good are contractible ex ante in the absence of a contract there will generally be underinvestment some of the contractual solutions to the underinvestment problem rely on complex direct revelation mechanisms that utilize private or unverifiable information to implement efficient investments as in for example rogerson 1992 and maskin and tirole 1999 but they are not robust to renegotiation several articles have focused on contracts that make explicit use of ex post renegotiation to achieve efficiency particularly aghion et al 1994 chung 1991 and edlin and reichelstein 1996 show that simple fixed price fixed quantity contracts may suffice to achieve the first best outcome such contracts are in general not efficient ex post but as long as mutually beneficial renegotiation of the initial contract is allowed both ex ante and ex post efficiency can be achieved either by a properly designed renegotiation game as in aghion et al

transmission loss allocation a comparison of different practical algorithms a pool operated electricity market based on hourly auctions usually neglects network constraints and network losses while applying its market clearing mechanism this mechanism determines the accepted and nonaccepted energy bids as well as the hourly market clearing prices as a result ex post procedures are needed to resolve network congestions and to allocate transmission losses to generators and demands this paper focuses on transmission loss allocation procedures and provides a detailed comparison of four alternative algorithms 1 pro rata pr 2 marginal allocation 3 unsubsidized marginal allocation and 4 proportional sharing a case study based on the ieee rts is provided different load scenarios covering a whole year are analyzed finally conclusions and recommendations are stated

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

the new economics of regulation ten years after the new economics of regulation is an application of the principal agent methodology to the contractual relationship between regulators and regulated firms after a critique of the traditional paradigms of regulation from the point of view of information economics a canonical model of regulation under asymmetric information is developed a survey of the main results obtained in the new economics of regulation is then provided in particular concerning the implementation of optimal contracts by a menu of linear contracts the dichotomy between pricing and cost reimbursement rules the auctioning of incentive contracts the dynamics of contracting under limited commitment and the hierarchical problems in regulation empirical implications are then discussed and avenues of further research are described in the conclusion

information provision before a contract is offered this paper considers an agency model in which the agent can update the principal s belief before the contract is offered we identify that the agent who has a bad potential to perform the task has a small chance to receive information rent but if he receives it he receives a large amount thus the agent may choose to provide more information that shifts the principal s belief to the negative direction if the prior belief is optimistic

information management in incentive problems we extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost reducing effort concer

the global business revolution the cascade effect and the challenge for firms from developing countries the global business revolution since the 1980s has witnessed an unprecedented degree of industrial consolidation and concentration of business power at a global level firms with powerful globally recognised technologies and or brands constitute the systems integrators at the apex of extended supply chains this paper examines the supply chains in four different sectors aerospace telecommunications automobiles and beverages it finds that these sectors have striking similarities in the way in which the core systems integrators have stimulated industrial concentration across the whole supply chain this cascade effect has profound implications for firms from developing countries in catching up at the firm level

supplying information to facilitate price discrimination the authors examine the incentive of a seller to allow potential buyers to acquire private information about their tastes for the seller s product improved private information for buyers enables the seller to segment the market and charge higher prices to high value buyers however improved information can also provide rents to buyers in a variety of settings this tradeoff is optimally resolved at one of two extremes either buyers are supplied with the best available knowledge of their tastes or no information is supplied by the seller copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

long term relationships governed by short term contracts this paper studies the effects of contract duration on the incentive to invest in a relationship when its parties are rational and have perfect information and contracts are complete ex cept that short term contracts specify only current period actions t hen short term contracting distorts investment decisions only when t he efficient plan involves mainly sunk cost investment and the relati onship plays a consumption smoothing role there is a general but no t universal tendency to underinvest copyright 1988 by american economic association

optimal research for cournot oligopolists we extend the classical cournot model to take account of uncertainty in either the cost function or the demand function by undertaking research firms can acquire private asymmetric information to help resolve their uncertainty and make a more informed production decision the model is a two stage game in the first stage research levels are chosen and in the second stage conditional on private research outcomes production decisions are made we find that for a linear continuous information structure there is a unique nash equilibrium to the game in the equilibrium there may be an inefficient amount of aggregate research and there may be incomplete pooling as well the model specializes to the classical case when the cost of research is zero and each firm gains essentially the same information by doing an infinite amount of research or when the cost of research is so high no firm undertakes research

rational expectations information acquisition and competitive bidding most rational expectations market equilibrium models are not models of price formation and naive mechanisms leading to such equilibria can be severely manipulable in this paper a bidding model is developed which has the market like features that bidders act as price takers and that prices convey information higher equilibrium prices convey more favorable information about the quality of the objects being sold than do lower prices bidders can benefit from trading only if they have a transactions motive or if they have access to inside information apart from exceptional cases prices are not fully revealing a two stage model is developed in which bidders may acquire information at a cost before bidding and for which the equilibrium price is fully revealing resolving a well known paradox

the value of ignorance this article provides a new perspective on the information structure of an agent in a standard model of adverse selection before the contracting takes place the agent has the opportunity to gather private information on a relevant parameter that affects final payoffs i allow for the possibility that the agent remains uninformed with some probability the agent s optimal choice of information structure is derived and it is shown that in the case of two states of nature the possibility of remaining ignorant has a positive strategic value for the agent since a poor information structure generates strategic benefits there will be no equilibrium in which the agent is perfectly informed even if additional information is costless at the margin

endogenous private information structures we formally incorporate the option to gather information into a game and thus endogenize the information structure we ask whether models with exogenous information structures are robust with respect to this endogenization any nash equilibrium of the game with information acquisition induces a nash equilibrium in the corresponding game with an exogenous structure we provide sufficient conditions on the structure of the game for which this remains true when nash is replaced by sequential we characterize the sequential nash equilibria of games with exogenous information structures that can arise as a sequential nash equilibrium of games with endogenous information acquisition

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

gathering information before the contract is offered the case with two states of nature abstract focusing on a baron myerson model with two states of nature in the first part of the paper we study the contract that a principal would offer to an agent when he does not know whether the agent is informed or not about the state of nature in the second we endogenize the information of acquisition and show that in equilibrium a baron myerson type contract will never be offered

the design of supply contracts as a problem of delegation we consider the design of a supply contract as a problem of delegation in a buying firm in general the agent who acts on behalf of a principal in the firm cannot be assumed to transform her information in probability estimates like the principal would do possessing the same information in the investigated case of incomplete information the design of contracts is affected by the beliefs about characteristics of the supplier therefore it is important to analyze in which way the expected profit depends on these probabilities in order to find the principal s optimal instruction the best instruction is determined by a trade off between the costs due to the time the principal spends on dealing with the problem and formulating the instructions and the costs due to a suboptimal menu of contracts offered by the agent

endogenous price zones and investment incentives in electricity markets an application of multilevel optimization with graph partitioning in the course of the energy transition load and supply centers are growing apart in electricity markets worldwide rendering regional price signals even more important to provide adequate locational investment incentives this paper focuses on electricity markets that operate under a zonal pricing market design for a fixed number of zones we endogenously derive the optimal configuration of price zones and available transfer capacities on a network in order to optimally govern investment and production decisions in the long run in a multilevel mixed integer nonlinear model that contains a graph partitioning problem on the first level we determine welfare maximizing price zones and available transfer capacities for a given electricity market and analyze their impact on market outcomes using a generalized benders decomposition approach developed in grimm et al 2019 and a problem tailored scenario clustering for reducing the input data size we are able to solve the model to global optimality even for large instances we apply the approach to the german electricity market as an example to examine the impact of optimal zoning on key performance indicators such as welfare generation mix and locations or electricity prices it turns out that even for a small number of price zones an optimal configuration of zones induces a welfare level that almost approaches the first best

a penalty scheme for reducing electricity price volatility the deregulation of electric power systems in many parts of the world has changed the mechanism of electricity pricing unlike the fixed price in conventional power systems electricity price varies with time and location in the new deregulated environment electricity prices in a restructured power system can be highly volatile due to the random nature of system failures and demands it is therefore very difficult for the independent system operator iso to control the price and associated risk the high prices beyond control have resulted in significant impacts on customers as well as on system operation this paper proposes a penalty scheme for reducing electricity price volatility caused by failures in generation companies gencos or transmission companies transcos in this scheme gencos and transcos will be penalized if their equipment failures result in unexpected price changes the price decomposition technique is used to evaluate the price components caused by random failures the penalty can be calculated based on the difference of electricity price components between the normal state and the contingency states moreover a simplified schema which is based on profit analysis is also proposed in this paper the proposed penalty scheme not only gives the gencos and transcos an incentive to improve their reliabilities but also provides a flexible tool for the iso to control the system price risk the possible shortcomings of the proposed schema are also specified in the paper the ieee rts is analyzed to illustrate the technique

optimal ceo compensation some equivalence results i study optimal managerial contracts in two contracting environments when the investment return is contractible an optimal contract combines a base salary golden parachute and bonus when the return is not contractible two types of optimal contracts are studied a contract with restricted stock and a contract with stock options these three types of contracts are equivalent they implement the same outcome and lead to the same expected payoff for the manager implying that the choice of contractual form is irrelevant in the environment i study i suggest directions of research for the relevance of different contractual forms

pricing energy and reserves using stochastic optimization in an alternative electricity market this paper presents a stochastic linear programming model that can be used for pricing in electrical energy and reserve markets it addresses capacity energy and reserve dispatch problems that may arise from n 1 contingency scenarios possible market solutions focusing on generator compensation using real time day ahead and hybrid schemes are enumerated along with opportunities for consumer pricing and transmission costing this model is illustrated on a 6 bus test system as well as a larger 66 bus system representing the ontario network a key difference among schemes is the degree of risk to the generators measured by variance in profit

holdups simple contracts and information acquisition abstract in a typical procurement setup several recent papers have shown that when complete contracting is not possible simple noncontingent contracts may suffice to solve the under investment problem this paper points out that a noncontingent contract offer such as a fixed price contract may induce the seller to acquire information on the future course of costs and only to accept the offer if the cost is low it is shown that sometimes the buyer prefers to wait and buy on the spot market than to offer a long term contract when the seller rejects a contract offer or the buyer chooses not to make one the seller will not make efficient investments because he expects to be held up on the spot market

multiobjective optimization for pricing system security in electricity markets this paper proposes a novel technique for representing system security in the operations of decentralized electricity markets with special emphasis on voltage stability an interior point method is used to solve the optimal power flow problem with a multiobjective function for maximizing both social benefit and the distance to maximum loading conditions a six bus system with both supply and demand side bidding is used to illustrate the proposed technique for both elastic and inelastic demand and a 129 bus test system that models the italian hv transmission network is used for testing the practical applicability of the proposed method the results obtained show that the proposed technique is able to improve system security while yielding better market conditions through increased transaction levels and improved locational marginal prices throughout the system

nodal uniform or zonal pricing distribution of economic surplus competitive markets for electricity determine either a uniform marginal price ump a set of nodal marginal prices nmps or a smaller set of zonal marginal prices zmps in theory the nmp system is best as it correctly accounts for transmission constraints and losses in some versions but critics allege that the large number of prices is confusing since the ump or zmp solution must be adjusted to account for transmission constraints and losses it is reasonable to consider a market design in which actual dispatch corresponds to an nmp model that accounts for losses and if a ump or zmp model is used at all it is only to compute prices for settlements and compensation for constrained on or off generation or load we prove that if used in this way the ump or zmp models a do not affect the total economic surplus b redistribute the surplus among generators and loads at the different nodes and c give perverse incentives for generation expansion we illustrate on a realistic system

informing consumers about their own preferences we analyze a model of monopolistic price discrimination where only some consumers are originally sufficiently informed about their preferences e g about their future demand for a utility such as electricity or telecommunication when more consumers become informed we show that this benefits also those consumers who remain uninformed as it reduces the firm s incentives to extract information rent by reducing the costs of information acquisition or forcing firms to supply consumers with the respective information about past usage policy can further improve welfare as contracts become more efficient the last observation stands in contrast to earlier findings by cremer and khalil american economic review 1992 where all consumers are uninformed

endogenous information acquisition in bayesian games with strategic complementarities abstract this paper studies covert or hidden information acquisition in common value bayesian games of strategic complementarities using the supermodular stochastic order to arrange the structures of information increasingly in terms of preferences we provide novel easily interpretable and verifiable though restrictive conditions under which the value of information is increasing and convex and study the implications in terms of the equilibrium configuration increasing marginal returns to information leads to extreme behavior in that agents opt either for the highest or the lowest quality signal so that the final analysis of this complex game simplifies greatly into that of a two action game this result can rationalize the complete information game as an endogenous outcome finally we also establish that higher quality information leads players to select more dispersed actions in the bayesian game

an agent based analysis of the german electricity market with transmission capacity constraints while some agent based models have been developed for analyzing the german electricity market there has been little research done on the emerging issue of intra german congestion and its effects on the bidding behavior of generator agents yet studies of other markets have shown that transmission grid constraints considerably affect strategic behavior in electricity markets in this paper the implications of transmission constraints on power markets are analyzed for the case of germany market splitting is applied in the case of congestion in the grid for this purpose the agent based modeling of electricity systems ames market package developed by sun and tesfatsion is modified to fit the german context including a detailed representation of the german high voltage grid and its interconnections implications of transmission constraints on prices and social welfare are analyzed for scenarios that include strategic behavior of market participants and high wind power generation it can be shown that strategic behavior and transmission constraints are inter related and may pose severe problems in the future german electricity market

long term short term and renegotiation on the value of commitment in contracting spot contracting generally involves efficiency losses relative to long term contracting it is proved here that short term contracting and renegotiation allow to achieve long run efficiency when transfers are not limited objectives are conflicting and no relevant asymmetric information appears at recontracting dates this last assumption excludes adverse selection but not moral hazard when technologies and preferences are time separable copyright 1990 by the econometric society

information acquisition and relative efficiency of competitive oligopoly and monopoly markets this paper analyzes the relative efficiency of a competitive equilibrium against cournot oligopoly and monopoly equilibria when firms have diverse private information about the stochastic market demand when firms have information of the same precision the competitive equilibrium yields a larger expected welfare however when information is costly cournot oligopoly and monopoly firms acquire more information and hence may yield a larger expected welfare than the competitive firms under certain conditions the author also finds that competitive firms acquire less than the efficient level of information while cournot oligopoly and monopoly firms may acquire more than the efficient level copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

strategic bidding and rebidding in electricity markets abstract successful deregulation in electricity markets depends crucially on the ability of market regulation to promote and maintain free competition there are however important physical characteristics in electricity markets such as the constraints imposed by the physical transmission infrastructure that have the potential to undermine competition and provide opportunities for market participants to exploit temporary positions of market power in this paper the regional market of queensland australia is analysed it is found that strategic behaviour by generators exists and is closely related to the occurrence of the kind of extreme price events that characterise many deregulated electricity markets in addition rebidding behaviour by base load generators immediately after extreme price events is shown to have negative impacts on the operation of the market the key message is that promotion of competition in electricity markets can have undesirable consequences unless the regulatory policy is carefully designed to counter strategic behaviour by market participants

ramsey prices in the italian electricity market abstract in this paper we derive optimal zonal prices in the italian day ahead electricity market using estimation of a complete system of hourly demand in 2010 2011 in italy the hourly equilibrium price for all buyers is computed as a uniform average of supply zonal prices resulting from market splitting due to line congestion we model ex ante individual bids expressed by heterogeneous consumers which are distinguished by geographical zones using empirical estimations we compute demand elasticity values and new zonal prices according to a ramsey optimal scheme this is a new approach in the wholesale electricity market literature as previous studies have discussed the relative merit of zonal prices considering only the issue of line congestion our results show that the optimal pricing scheme can improve welfare in the day ahead italian electricity market with respect to both the existing uniform price scheme and the proposal to charge the existing supply zonal prices to the demand side

modeling the impact of a wind power producer as a price maker wind energy is present in many countries throughout the world the main types of wind sales in electricity markets are via regulated tariffs or pool based markets production companies choose cost effective options for selling wind energy and some markets like the irish electricity market use regulated tariffs to remunerate wind production this paper aims to provide some answers to explain what effect wind offers may have in an electricity market if wind power producers participated in the day ahead market without receiving any premium or aid a price maker optimization model is used to detect its effect on prices the model encompasses energy offers by other technologies using residual demand curves and detailed modeling of wind imbalances it is observed that wind acting as price maker reduces electricity prices and the imbalance penalties help the system operator to reduce imbalances a realistic case study using data from the irish electricity market illustrates the methodology used comparing the effect of imbalance penalties in the models in terms of profit and total imbalance of the system

intra firm trade abstract the study analyses intra firm trade that is the estimated one third of world trade which is transacted between affiliated parties as firms realize the increasing potential for integrating their operations throughout the world they are contributing to significant shifts in the patterns of interntional trade and industrial development as emphasized here international trade is inextricably linked to the growing and substantial share of transactions between affiliated parties conveyed through multinational enterprises

optimal information acquisition for heterogenous duopoly firms abstract this paper analyzes a stochastic duopoly market in which heterogenous firms acquire costly information about the stochastic market demand prior to their production decisions the equilibrium amounts of information acquired by each firm are compared the comparative statics analyses show the differential effects of a change in information cost the degree of uncertainty in the market demand and the demand and cost function parameters journal of economic literature classification numbers d82 l13 l15

adverse selection with endogenous information in insurance markets abstract models of adverse selection assume that risk type is known to the consumer but not to the insurer many analyses suggest that information has zero social value and negative prior value why then would consumers become informed what is the incentive to gather information and why does adverse selection arise we show that the private value of information is non negative only if insurers cannot observe consumers information status or if consumers can conceal their informational status we examine the existence and characterization of equilibria under different configurations of information costs and benefits finally we examine some welfare implications of the endogenous information model for public policy regarding genetic testing and for state regulations concerning hiv testing

free entry does not imply zero profits traditional economic wisdom says that free entry in a market will drive profits down to zero this paper shows that profits may remain bounded away from zero when firms have to make a negligible small investment to learn the demand

the value of genetic information in the life insurance market abstract this paper analyzes the effects of additional information in a life insurance market under adverse selection individuals have an incentive to acquire information about their risk type if their informational status cannot be observed by insurers in aggregate however the existence of a testing opportunity has an effect on the equilibrium premium we describe the conditions under which from an ex ante standpoint all individuals gain all lose or in which some gain and some lose from the existence of the test

ignorance promotes competition an auction model with endogenous private valuations we study a situation in which an auctioneer wishes to sell an object toone of n risk neutral bidders with heterogeneous preferences theauctioneer does not know bidders preferences but has private informationabout the characteristics of the ob ject and must decide how muchinformation to reveal prior to the auction we show that the auctioneerhas incentives to release less information than would be efficient andthat the amount of information released increases with the level ofcompetition as measured by the number of bidders furthermore in aperfectly competitive market the auctioneer would provide the efficientlevel of information

advance purchase discounts as a price discrimination device in an intertemporal setting in which individual uncertainty is resolved over time advance purchase discounts can serve to price discriminate between consumers with different expected valuations for the product consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance purchase discount consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high we characterize the profitmaximizing pricing strategy of the monopolist furthermore adopting a mechanism design perspective we provide a necessary and sufficient condition under which advance purchase discounts implement the monopolist s optimal mechanism

incomplete contracts specific investments and risk sharing an optimal contract design problem is considered contracts which are incomplete and simple are used to investigate the extent to which constrained revisions can mitigate inefficiencies resulting from contractual incompleteness an optimal contract is characterized in two cases first when a contract is being used to facilitate trade between two risk neutral parties who must make relationship specific investments it is possible to implement the first best by a simple contract second when a contract is being used to share risk it is generally not possible to implement the first best when one party is risk neutral however it is possible to implement the first best by assigning all the ex post decision rights to that party

economic inefficiencies and cross subsidies in an auction based electricity pool this paper compares two contrasting yet often used electricity market clearing procedures i an auction based algorithm including congestion management and transmission loss cost allocation and ii an optimal power flow the auction procedure produces a single period unit commitment and hence can be compared directly to an optimal power flow solution these algorithms are compared in terms of the economic efficiency of the solution attained and in terms of cross subsidies among generators and demands the purpose of this comparison is to quantify the actual cost to market participants of using a simple seemingly transparent procedure such as an auction based algorithm versus an integrated but computationally intensive one such as an optimal power flow

genetic testing in competitive insurance markets with repulsion from chance a welfare analysis a central theme in the international debate on genetic testing concerns the extent to which insurance companies should be allowed to use genetic information when offering insurance contracts we provide a welfare analysis of this issue within a model of an insurance market with asymmetric information having the following crucial feature in addition to a state contingent consumption profile a person s well being depends on her attitude towards resolution of future health uncertainty and this attitude varies across the population we present stylized facts that motivate this approach in the formal analysis we find that both tested high risks and untested individuals are equally well off whether or not test results can be used by insurers individuals who test for being low risks on the other hand are made worse off by not being able to verify this to insurers this implies that in terms of welfare a regulatory regime in which the use of genetic information by insurers is allowed is better than one in which it is not allowed

pessimistic information gathering an agent gathers information on productivity shocks and accordingly produces on behalf of a principal information gathering is imperfect and whether it succeeds or not depends on the agent s effort contracting frictions come from the fact that the agent is pessimistic on the issue of information gathering and there are both moral hazard in information gathering private information on productivity shocks and moral hazard on operating effort an optimal menu of linear contracts mixes high powered productivity dependent screening options following good news with a fixed low powered option otherwise

agri environmental schemes adverse selection information structure and delegation this work analyzes alternative designs of agri environmental schemes and how different incentive mechanisms impact on their overall efficiency it focuses on spatial targeting and delegation in an asymmetric information context first the optimal contract under adverse selection is modeled this model underlines the trade off between information rents and allocative efficiency the impact of spatial targeting is then addressed disaggregated information structures increase the optimal efforts asked of the farmers it may also involve higher information rents and may reduce the net contributions of some farmers finally the consequences of delegating authority within the principal agent relationship are investigated the results illustrate that spatial targeting and delegation when combined have asymmetric impacts on farmers payoffs

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

bargaining with endogenous information two ex ante identically informed agents play a double auction over the division of a trading surplus with endogenous information and common values this paper shows that if information acquisition is not observable three types of inefficiencies can arise if the information cost is in an intermediate range no pure strategy equilibrium with trade exists although the agents maintain symmetric information if the information cost is low any trading equilibrium exhibits costly information acquisition if the agents face asymmetric information cost the akerlof s lemons problem arises as a self fulfilling equilibrium and only partial trade occurs