A wind tunnel test of wind farm auctions

Globally, governments increasingly rely on auctions to advance renewable energy. We study the design of wind farm auctions and analyze the impact of price guarantees and subsidies. While in the theoretical analysis the price guarantee has no effect, our laboratory experiment suggests that it improves efficiency and often increases production and revenue. The price guarantee turns out to nullify correlations between participants’ willingness to take risks and their bids, which, in turn, improves efficiency relative to the case without price guarantee. The subsidy is less effective than suggested by theory. Bidders with a higher valuation tend to bid more conservatively than the equilibrium prediction, thus neutralizing the efficiency-enhancing effect of the subsidy. Our results may have implications for other auctions in which rights are allocated to enter markets characterized by heavy upfront investments and uncertainty about future payoffs.