Financial contracts as coordination device. Issue 2 (23rd January 2020)

• Record Type: Journal Article
• Authors: Le Coq, Chloé; Schwenen, Sebastian
• Is Part Of: Journal of economics & management strategy. Volume 29:Issue 2(2020)
• Page Start: 241
• Page End: 259
• Publication Date: 2020-01-23
• Subjects: auctions -- coordination -- electricity -- forward markets -- volunteer's dilemma; Economics -- Periodicals; Business -- Periodicals; Management -- Periodicals; Strategic planning -- Periodicals; 330.1
• DOI: 10.1111/jems.12340
• Languages: English
• ISSNs: 1058-6407

Abstract

Abstract: We study the use of financial 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.