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| Title: | Unit-Contingent Electricity Swap and Asymmetric Information About Plant Outage |
| Authors: | Wu, Owen, Q. |
| Other Contributor(s): | Babich, Volodymyr |
| Keywords: | unit-contingent electricity swap
asymmetric information
Bayesian equilibrium
risk allocation |
| Issue Date: | May-2009 |
| Abstract: | This paper analyzes a unit-contingent swap contract between a power plant and an electricity distributor. Under such a contract the distributor pays the power plant a ¯fixed price if the plant is operational and nothing if plant outage occurs. Pricing a unit-contingent swap is complicated by the fact that the power plant's operational status is its private information and is costly for the distributor to observe. The difference between the electricity spot price and the unit-contingent swap price provides an incentive for the plant to misreport its status and earn pro¯t at the distributor's expense. To prevent misreporting the distributor may inspect the plant and levy penalties if misreporting is discovered. We model the Bayesian inspection game between the plant and the distributor, characterize the structure of the optimal penalties the distributor should impose, and compute the corresponding unit-contingent swap prices. We show that the seemingly undesirable misreporting behavior of the plant, when controlled well, can actually bene¯t both the plant and the distributor because misreporting could serve as a risk-allocation mechanism between the two parties. |
| Other Identifiers: | 1120 |
| Classification: | Management and Organizations (starting Spring 2004) |
| Appears in Collections: | Ross School of Business - Working Papers Series
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