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« Pitfalls of Insuring Production Risk: a Case Study on some Wind Power Auctions in France »
Résumé : We consider auctions for procurement contracts involving exogenous production risk and whose payment rule depends not only on realized production but also on self-reported expected production. We first establish a conflict between insurance provision and strategy-proofness. We then analyze equilibrium bidding behavior under several paradigms regarding bidders’ ability to misreport their expected production and illustrate our results on the pitfalls of production-insuring payment rules through simulations calibrated for some offshore wind power auctions in France.
We estimate that a single strategic bidder could capture a rent that is more than 10 times larger than the potential benefits from reduced risk premiums under truthful reporting.
Lastly, we introduce variants of the French rule, in particular with punishments aimed to discourage misreporting, and find limited room for improving unit-price contracts.