The Welfare Effects of Complementary Bidding Mechanisms: An Empirical Analysis of the Spanish Wholesale Electricity Market (Job Market Paper) [.pdf]
In many multi-unit auctions, bidders' valuations for a particular good depend on whether or not they also win the auction for another good. In these environments, the auctioneer can allow bidders to reflect these complementarities through additional bidding mechanisms. This paper studies the welfare effects of one such mechanism: “complex bids,” a complementary bidding procedure used in wholesale electricity auctions that allows companies to specify a minimum revenue threshold for the day. Complex bids allow generating companies to explicitly link their valuations across different hours of the day, which would not be possible in an otherwise uniform price auction. The welfare implications of introducing such bidding procedures are ambiguous. Allowing for greater flexibility has the potential of improving the efficiency in the market, but also gives bidders an additional dimension through which they may exert market power. I develop a model of complex bidding and estimate its structural parameters in the context of the Spanish electricity market. I then perform a counterfactual analysis in which the original mechanism is compared to one in which complex bids are not allowed. I find that, while firms do exercise market power through complex bids, the positive coordination benefits of complex bidding dominate. The distributional implications of removing complex bids are particularly important. I find that, in the absence of complex bids, increased volatility due to less coordination could increase prices by 7.9%, translating into an increase of over 550M euro of annual payments by consumers.
Pollution Permits and the Evolution of Market Structure, with Meredith Fowlie and Stephen P. Ryan [new version coming soon]
We explore the long run dynamic implications of subjecting an imperfectly competitive industry to market-based pollution regulation. We are particularly interested in understanding how emissions permit allocation design choices can influence the evolution of industry structure in an oligopolistic market with capacity constraints. Using two decades of panel data on the US Portland cement industry, we estimate a fully dynamic model of firms' strategic entry, exit, production, and investment decisions. We then use the model to simulate counterfactual outcomes under three allocation regimes: auctioning, grandfathering, and output-based updating. We find that the dynamic evolution of market structure can vary significantly across the policy scenarios we consider. This has important implications for the overall costs of achieving desired emissions reductions and the distribution of those costs.
Grandfathering and the Endowment Effect: An Assessment in the Context of the Spanish National Allocation Plan, with A. Denny Ellerman, CEEPR WP-2008-018 [.pdf]
This paper tests the Coase theorem in the context of carbon emissions trading. We investigate whether electricity generating firms were influenced in their operational decisions by their initial allocation of grandfathered emission permits. Theory suggests that under a broad set of assumptions, the initial allocation should not affect production outcomes. We exploit a non-linearity in the allocation rule of CO2 allowances across coal plants in Spain under the trial period of the European Union Emission Trading Scheme to test for the relevance of the initial allocation to abatement outcomes. The results provide no evidence of an “endowment effect,” as there appears to be no systematic relationship between the initial endowment and production decisions at the unit level. In future work, we plan to revisit these results and extend them with new tests of pass-through and cost internalization.