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Market Structure, Risk Preferences, and Forward Contracting Incentives

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  • David P. Brown
  • David E. M. Sappington

Abstract

We examine the determinants of the levels of forward contracting preferred by generators and buyers of electricity. Increased forward contracting systematically reduces the variance of a generator's profit, so a generator prefers higher levels of forward contracting as market uncertainty or its aversion to risk increases. In contrast, increased forward contracting can either increase or reduce the variance of a buyer's profit. Consequently, a buyer can prefer either reduced or increased levels of forward contracting as market uncertainty or its aversion to risk increases.

Suggested Citation

  • David P. Brown & David E. M. Sappington, 2023. "Market Structure, Risk Preferences, and Forward Contracting Incentives," Journal of Industrial Economics, Wiley Blackwell, vol. 71(4), pages 1146-1202, December.
    • Handle: RePEc:bla:jindec:v:71:y:2023:i:4:p:1146-1202
    DOI: 10.1111/joie.12352
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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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