An adverse selection approach to power pricing

Abstract:

We study the optimal design of electricity contracts among a  population of consumers with different needs. This question is tackled within the framework of Principal-Agent  problem in presence of adverse selection. The particular features of electricity induce an unusual  structure on the production cost, with no decreasing return to scale. We are nevertheless able to provide an  explicit solution for the problem at hand.  The optimal contracts are either linear or polynomial with  respect to the consumption.

Whenever the outside options offered by competitors are not uniform among the different type ofconsumers, we exhibit situations where the electricity provider should
contract with consumers with either low or high appetite for electricity.

Posted on Jul 24, 2017 in Optimization and Equilibrium, Seminars