Financial Contracts as Coordination Device

Chloe Le Coq and Sebastian Schwenen ()

No 47, SITE Working Paper Series from Stockholm School of Economics, Stockholm Institute of Transition Economics

Abstract: We study the use of fi nancial contracts as bid-coordinating device in multi-unit uniform price auctions. Coordination is required whenever firms face a volunteer's dilemma in pricing strategies: one firm (the "volunteer") is needed to increase the market clearing price. Volunteering, however, is costly, as inframarginal suppliers sell their entire capacity whereas the volunteer only sells residual demand. We identify conditions under which signing financial contracts solves this dilemma. We test our framework exploiting data on contract positions by large producers in the New York power market. Using a Monte Carlo simulation, we show that the contracting strategy is payoff dominant and provide estimates of the benefits of such strategy.

Keywords: Auctions; Coordination; Volunteers dilemma; Forward markets; power market (search for similar items in EconPapers)
JEL-codes: D21 D44 L41 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2019-04-24
New Economics Papers: this item is included in nep-com, nep-cta, nep-des and nep-gth
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Related works:
Journal Article: Financial contracts as coordination device (2020)
Working Paper: Financial contracts as coordination device (2020)
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