Economics Research Works

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Auction Design for Colombia’s Forward Energy Market
(University of Maryland, 2007-06) Cramton, Peter
Auctioning Many Divisible Goods
(MIT Press, 2004) Ausubel, Lawrence M.; Cramton, Peter
We study the theory and practical implementation of auctioning many divisible goods. With multiple related goods, price discovery is important not only to reduce the winner’s curse, but more importantly, to simplify the bidder’s decision problem and to facilitate the revelation of preferences in the bids. Simultaneous clock auctions are especially desirable formats for auctioning many divisible goods. We examine the properties of these auctions and discuss important practical considerations in applying them.
Auctioning Securities
(University of Maryland, 1998-03) Ausubel, Lawrence M.; Cramton, Peter
Treasury debt and other divisible securities are traditionally sold in either a pay-your-bid(discriminatory) auction or a uniform-price auction. We compare these auction formats with a Vickrey auction and also with two ascending-bid auctions. The Vickrey auction and the alternative ascending-bid auction (Ausubel 1997) have important theoretical advantages for sellers. In a setting without private information, these auctions achieve the maximal revenue as a unique equilibrium in dominant strategies. In contrast, the pay your-bid, uniform-price, and standard ascending-bid auction admit a multiplicity of equilibria that yield low revenues for the seller. We show how these results extend to a setting where bidders have affiliated private information. Our results question the standard ways that securities are offered to the public.
Balance of Payment Crises In Emerging Markets: Large Capital Inflows and Sovereign Governments
(1998-03-15) Calvo, Guillermo A.
The paper shows that the combination of large capital inflows and sovereign governments could give rise to self-fulfilling balance of payments crises. It argues that a current account deficit could impair the resolution of such crises, but the crises themselves could occur even though the current account was in balance. The key is a weak financial sector, possibly made so by an accommodating central bank. In contrast with most of the literature on this subject, the paper endogenizes output and discusses the channels (New Classical and Keynesian) through which a BOP crisis can result in output collapse. Building on a Time to Build model, the paper shows that a growth slowdown can take place even though a BOP crisis brings about no current account reversal.
Betting Against The State: Socially Costly Financial Engineering
(Elsevier, 1999-05-29) Calvo, Guillermo A.
The central question raised in the paper is the desirability of state-contingent contracts under imperfect policy credibility. The paper shows a benchmark case in which imperfect credibility of a trade liberalization program is distorting, and the distortion is magnified by statecontingent markets. In addition, it examines the welfare implications of gaining credibility concluding that, in general, more credibility is better than less, and examines the moral hazard faced by policymakers in carrying out reform in case the private sector is able to obtain insurance against its discontinuation.
A Brief Guide to C and C++ for Fortran or Basic Programmers
(1999) Almon, Clopper
This paper introduces C and C++ programming for learners who already have some experience in another language such as Fortran or Basic. It explains basic syntax, dynamic space allocation, structures, classes, constructors and destructors, and overloading of operators. All concepts are illustrated with working programs.
Burst of Fall, A Painting by Alma Thomas
(2019-01) Almon, Clopper
"Burst of Fall" is a 1968 painting by the Alma W. Thomas, and African-American woman painter of the Washington Color school. This brief note describes the circumstances of its origin and of its initial purchase. It includes as jpg image of the painting.
A Capacity Market that Makes Sense
(Elsevier Science, 2005-06-15) Cramton, Peter; Stoft, Steven
We argue that a capacity market is needed in most restructured electricity markets, and present a design that avoids problems found in the early capacity markets. The proposed market only rewards capacity that contributes to reliability as demonstrated by its performance during hours in which there is a shortage of operating reserves. The capacity price responds to market conditions, increasing when and where capacity is scarce and decreasing to zero when and where it is plentiful. Market power in the capacity market is addressed by basing the capacity price on actual capacity, rather than bid capacity, so generators cannot increase the capacity price by withholding supply. Actual peak energy rents (the short-run energy and reserve profits of a benchmark peaking unit) are subtracted from the capacity price. This allows the capacity market to more accurately control short-run profits and suppresses market power in the energy market. This design both avoids and hedges energy market risk, and by suppressing market power avoids regulatory risk. Risk reduction saves consumers money as do the performance and investment incentives inherent in the pay-for-performance mechanism.
Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops
(Journal of Applied Economics, 1998-11) Calvo, Guillermo A.
The paper studies mechanisms through which a sudden stop in international credit flows may bring about financial and balance of payments crises. It is shown that these crises can occur even though the current account deficit is fully financed by foreign direct investment. However, equity and long-term bond financing may shield the economy from sudden stop crises. The paper also examines possible factors that could trigger sudden stops, and argues that the greater independence that countries have, as compared to regions of a given country, could help to explain why sudden stop crises are more prevalent and destructive at international than at national levels.
The Case in Support of Restaurant Hygiene Grade Cards
(American Agricultural Economics Association, 2005) Jin, Ginger Zhe; Leslie, Philip
CENTRAL LIMIT THEORY FOR COMBINED CROSS SECTION AND TIME SERIES WITH AN APPLICATION TO AGGREGATE PRODUCTIVITY SHOCKS
(Cambridge University Press, 2022-09-19) Hahn, Jinyong; Kuersteiner, Guido; Mazzocco, Maurizio
Combining cross-sectional and time-series data is a long and well-established practice in empirical economics. We develop a central limit theory that explicitly accounts for possible dependence between the two datasets. We focus on common factors as the mechanism behind this dependence. Using our central limit theorem (CLT), we establish the asymptotic properties of parameter estimates of a general class of models based on a combination of cross-sectional and time-series data, recognizing the interdependence between the two data sources in the presence of aggregate shocks. Despite the complicated nature of the analysis required to formulate the joint CLT, it is straightforward to implement the resulting parameter limiting distributions due to a formal similarity of our approximations with Murphy and Topel’s (1985, Journal of Business and Economic Statistics 3, 370–379) formula.
Collusive Bidding in the FCC Spectrum Auctions
(The Berkley Electronic Press, 2002) Cramton, Peter; Schwartz, Jesse A.
This paper describes the bid signaling that occurred in many of the FCC spectrum auctions. Bidders in these auctions bid on numerous spectrum licenses simultaneously, with bidding remaining open on all licenses until no bidder is willing to raise the bid on any license. Simultaneous open bidding allows bidders to send messages to their rivals, telling them on which licenses to bid and which to avoid. This "code bidding" occurs when one bidder tags the last few digits of its bid with the market number of a related license. We examine how extensively bidders signaled each other with retaliating bids and code bids in the DEF-?block PCS spectrum auction. We and that only a small fraction of the bidders commonly used retaliating bids and code bids. These bidders won more than 40% of the spectrum for sale and paid significantly less for their overall winnings.
Collusive Bidding: Lessons from the FCC Spectrum Auctions
(Springer-Verlag, 2000-05) Cramton, Peter; Schwartz, Jesse A.
The Federal Communications Commission (FCC) spectrum auctions use a simultaneous ascending auction design. Bidders bid on numerous communication licenses simultaneously, with bidding remaining open on all licenses until no bidder is willing to bid higher on any license. With full revelation of bidding information, simultaneous open bidding allows bidders to send messages to their rivals, telling them on which licenses to bid and which to avoid. These strategies can help bidders coordinate a division of the licenses, and enforce the proposed division by directed punishments. We examine solutions to mitigate collusive bidding in the spectrum auctions, and then apply these ideas to the design of daily electricity auctions.
Colombia Firm Energy Market
(Hawaii International Conference on System Sciences, 2007-01) Cramton, Peter; Stoft, Steven
A firm energy market for Colombia is presented. Firm energy—the ability to provide energy in a dry period—is the product needed for reliability in Colombia’s hydrodominated electricity market. The firm energy market coordinates investment in new resources to assure that sufficient firm energy is available in dry periods. Load procures in an annual auction enough firm energy to cover its needs. The firm energy product includes both a financial call option and the physical capability to supply firm energy. The call option protects load from high spot prices and improves the performance of the spot market during scarcity. The market provides strong performance incentives through the spot energy price. Market power is addressed directly: existing resources cannot impact the firm energy price. Since load is hedged from high spot prices, the market can rely on high prices to balance supply and demand during dry periods, rather than rationing.
Competitive Bidding Behavior in Uniform-Price Auction Markets
(Hawaii International Conference on System Sciences, 2004-01) Cramton, Peter
Profit-maximizing bidding in uniform price auction markets involves bidding above marginal cost. It therefore is not surprising that such behavior is observed in electricity markets. This incentive to bid above marginal cost is not the result of coordinated action among the bidders. Rather, each bidder is independently selecting its bid to maximize profits based on its estimate of the residual demand curve it faces. The supplier bids a price for its energy capacity to optimize its marginal tradeoff between higher prices and lower quantities. Price response from either demand or other suppliers prevents the supplier from raising its bid too much. Profit maximizing bidding should be expected and encouraged by regulators. It is precisely this profit maximizing behavior that guides the market toward long-run efficient outcomes.
COMPETITIVE BIDDING BEHAVIOR IN UNIFORM-PRICE AUCTION MARKETS
(Federal Energy Regulatory Commission, 2003-03) Cramton, Peter
Contagion in Emerging Markets: When Wall Street is a carrier
(1999-05-02) Calvo, Guillermo A.
The paper examines the case in which the capital market is populated by informed and uninformed investors. The uninformed try to extract information from informed investors’ trades. This opens up the possibility that if informed investors are forced to sell emerging market securities to meet margin calls, for example, this action may be misread by the uninformed investors as signaling low returns in emerging markets. The paper presents a simple model in which this type of Wall Street confusion may result in a collapse in emerging markets’ output.
The Convergence of Market Designs for Adequate Generating Capacity With Special attention to the CAISO’s Resource Adequacy Problem
(2006-04) Cramton, Peter; Stoft, Steven
This paper compares market designs intended to solve the resource adequacy (RA) problem, and finds that, in spite of rivalrous claims, the most advanced designs have nearly converged. The original dichotomy between approaches based on long-term energy contracts and those based on short-term capacity markets spawned two design tracks. Long-term energy contracts led to call-option obligations which provide marketpower control and the ability to strengthen performance incentives, but this approach fails to replace the missing money at the root of the adequacy problem. Hogan’s (2005) energy-only market fills this gap. On the other track, the short-term capacity markets (ICAP) spawned long-term capacity market designs. In 2004, ISO New England proposed a short-term market with hedged performance incentives essentially based on high spot prices. In 2005, we developed for New England a forward capacity market, with load obligated to purchase a target level of capacity covered by an energy call option. The two tracks have now converged on two conclusions: (1) High real-time energy prices should provide performance incentives. (2) High energy prices should be hedged with call options. We argue that two more conclusions are needed: (3) Capacity targets rather than high and volatile spot prices should guide investment, and (4) Long-term physically based options should be purchased in a forward market for capacity. The result will be that adequacy is maintained, performance incentives are restored, market power and risks are reduced from present levels, and prices are hedged down to a level below the present price cap.
The Craft of Economic Modeling
(www.CreateSpace.com, 2017) Almon, Clopper
This book is a practical guide to building economic models, both macroeconomic and multisectoral. It uses free software available from the Internet together with regularly updated databanks including the quarterly national accounts of the United States. It does NOT deal with some recent fads in economic model building, such as Real Business Cycles, Computable General Equilibriium models, nor DSGE models, all of which are, in the author's opinion, "alternative reality" models at best.
Demand Reduction and Inefficiency in Multi-Unit Auctions
(2002-07) Ausubel, Lawrence M.; Cramton, Peter
Auctions typically involve the sale of many related goods. Treasury, spectrum and electricity auctions are examples. In auctions where bidders pay the market-clearing price for items won, large bidders have an incentive to reduce demand in order to pay less for their winnings. This incentive creates an inefficiency in multiple-item auctions. Large bidders reduce demand for additional items and so sometimes lose to smaller bidders with lower values. We demonstrate this inefficiency in an auction model which allows interdependent values. We also establish that the ranking of the uniform-price and pay-as-bid auctions is ambiguous in both revenue and efficiency terms. Bidding behavior in spectrum auctions, electricity auctions, and experiments highlights the empirical importance of demand reduction.

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