Interruption insurance for generation and distribution of electric power

We describe a simple insurance scheme for use in an environment in which consumers of electricity are differentiated by their value of uninterrupted service as well as their location. Location plays a determining role in the model, in that reliability of distribution is allowed to vary throughout the network. Consumers choose a level of compensation for service interruption and pay a premium that depends on this compensation, as well as the distribution reliability at their location. In the event of power shortages, the utility will interrupt consumers according to their selected compensation so as to minimize compensation payments. The premium schedule is designed to induce consumer self-selection which results in efficient rationing, i.e., consumers are interrupted in increasing order of their interruption losses. The tariff has the added feature of inducing consumers to purchase full insurance and thus transfers all of the risk to the utility. It is shown that with proper tuning the proposed insurance scheme is Pareto superior to a uniform service charge with random rationing.     

The complexity of resource allocation and price mechanisms under bounded rationality

Summary We develop a framework for designing and evaluating the complexity of mechanisms that allocate resources in a distributed setting to agents or processors with bounded computational ability. We discuss several mechanisms and describe the construction of efficient price based mechanisms, which exploit the decentralized aspects of the problem. These price mechanisms are polynomial in the number of resources, precision of the solution, and the logarithm of the number of agents.We thank Thomas Marschak and a anonymous referee for helpful suggestions. This research was been supported by National Science Foundation Grant IRI-8902813.     

Scoring rules: an alternative parameterization

This note presents an alternative parameterization of any scoring rule that satisfies the score-expansion property. This parameterization is based on the vector that specifies, for every number of alternatives k, k ≥ 3, the minimal size of a coalition that can veto an alternative which is preferred by everybody outside the coalition. Our result sheds new light on the commonly used plurality and Borda rules, as well as the inverse plurality rule and any “vote for t alternatives rule”.     

Pre-assigned rents and bureaucratic friction

In this paper we study the endogenous determination of bureaucratic friction in a bureaucratic contest with () and without (n = 1) rent contestability. When n= 1 bureaucratic impediments induce the individual to undertake rent-securing activities at the same level as in the two-player rent-seeking contest. However, under rent contestability the bureaucracy no longer serves as a means of extracting resources from the public. The paper concludes with the study of the effect of ‘net costs’ on bureaucratic friction. It turns out that under cotestability the only reason for creating bureaucratic friction is the ‘negative costs’ it incurs while when n = 1 the effect of the bureaucrat's net costs of generating bureaucratic friction on the optimal degree of such friction is ambiguous. Received: October 30, 2000 / Accepted: December 28, 2001 RID="*" ID="*" The authors are grateful to two anonymous referees for their valuable comments     

Market Response to Liquidity Improvements: Evidence from Exchange Listings

The study examines a sample of 895 stocks that moved from Nasdaq to the New York Stock Exchange or to the American Stock Exchange (Amex) between 1971 and 1994. We show how various measures of liquidity such as the bid‐ask spread, trading volume, and stock price precision improve in somewhat different ways upon transfer to NYSE (Amex). We also find that reductions in trading costs (percentage spread) and in pricing error volatility (Hasbrouck's σ₅) can explain most of stock market's positive response to exchange listing. Thus, liquidity has many facets and cannot be represented by the bid‐ask spread alone.     

Optimal transmission switching: economic efficiency and market implications

Traditionally, transmission assets for bulk power flow in the electric grid have been modeled as fixed assets in the short run, except during times of forced outages or maintenance. This traditional view does not permit reconfiguration of the transmission grid by the system operators to improve system performance and economic efficiency. The current push to create a smarter grid has brought to the forefront the possibility of co-optimizing generation along with the network topology by incorporating the control of transmission assets within the economic dispatch formulations. Unfortunately, even though such co-optimization improves the social welfare, it may be incompatible with prevailing market design practices since it can create winners and losers among market participants and it has unpredictable distributional consequences in the energy market and in the financial transmission rights (FTR) market. In this paper, we first provide an overview of recent research on optimal transmission switching, which demonstrates the substantial economic benefit that is possible even while satisfying standard N−1 reliability requirements. We then discuss various market implications resulting from co-optimizing the network topology with generation and we examine how transmission switching may affect locational Marginal Prices (LMPs), i.e., energy prices, and revenue adequacy in the FTR market when FTR settlements are financed by congestion revenues.     

Prize sharing in collective contests

The characteristics of endogenously determined sharing rules and the group-size paradox are studied in a model of group contest with the following features: (i) The prize has mixed private–public good characteristics. (ii) Groups can differ in marginal cost of effort and their membership size. (iii) In each group the members decide how much effort to put without observing the sharing rules of the other groups. It is shown that endogenous determination of group sharing rules completely eliminates the group-size paradox, i.e. a larger group always attains a higher winning probability than a smaller group, unless the prize is purely private. In addition, an interesting pattern of equilibrium group sharing rules is revealed: The group attaining the lower winning probability is the one choosing the rule giving higher incentives to the members.     

Diversity in the regulation of Islamic Financial Institutions

More than 200 Islamic Financial Institutions (IFIs) are reported to have total combined assets in excess of US$ 200 billion with an annual growth rate estimated between 10 and 15%. The regulatory regime governing IFIs varies across countries. International organizations have been established to set standards that would strengthen and eventually harmonize prudential regulations as they apply to IFIs. The paper contributes to the discussion on the nature of the prudential standards to be developed. It clarifies risks IFIs are exposed to and the type of regulation that would help to manage them. It considers that the industry is still evolving with an anticipated convergence of the practice of Islamic financial intermediation with its conceptual foundations. Accordingly, the paper contrasts the risks and regulation that would be needed in the case of Islamic financial intermediation operating according to core principles and current practice. Implications for approaches to capital adequacy, licensing requirements and reliance on market discipline are outlined. The paper suggests an organization of the industry that would allow it to develop in compliance with its principles and prudent risk management and to facilitate its regulation.     

Trading frequency and the efficiency of price discovery in a non-dealer market

The increasing popularity of non-dealer security markets that offer automated, computer-based, continuous trading reflects a presumption that institutionally-set trading sessions are economically obsolete. This theoretical paper investigates the effect of the trading frequency, a key feature of the trading mechanism, on the efficiency of price discovery in a non-dealer market. By tracing the market pricing error to the correlation structures of arriving information and pricing errors of individual traders, the effect of diverging expectations on error-based and overall return volatility is isolated. The analysis reveals that, due to a portfolio effect, an increase in the trading time interval has contradictory effects on the portion of return volatility stemming from pricing errors. The greater accumulation of information increases error-based return volatility, but the greater volume and number of traders per session have the opposite effect. The net effect on overall return volatility can go either way. It is found that the return volatility of heavily traded securities is likely to be minimized under continuous trading, but that of thinly traded securities may be minimized under discrete trading at moderate time intervals. The latter is more likely to occur the greater is the divergence of expectations among traders. These findings challenge the presumption that automated continuous trading in a non-dealer market is more efficient than discrete trading for all securities, regardless of trading volume. The findings are applicable to all economies, but have special importance for developing countries where typically a single market is dominated by small issues and a low volume of trade. As a by-product of the analysis, it is shown how to correct the biased estimate of inter-session price volatility when observations are less frequent than the trading sessions themselves.