Market Structure, Risk Preferences, and Forward Contracting Incentives

David Brown and David Sappington

Journal of Industrial Economics, 2023, vol. 71, issue 4, 1146-1202

Abstract: We examine the determinants of the levels of forward contracting preferred by generators and buyers of electricity. Increased forward contracting systematically reduces the variance of a generator's profit, so a generator prefers higher levels of forward contracting as market uncertainty or its aversion to risk increases. In contrast, increased forward contracting can either increase or reduce the variance of a buyer's profit. Consequently, a buyer can prefer either reduced or increased levels of forward contracting as market uncertainty or its aversion to risk increases.

Date: 2023
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https://doi.org/10.1111/joie.12352

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Working Paper: Market Structure, Risk Preferences, and Forward Contracting Incentives (2021)
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