Testing Institutional Arrangements via Agent-Based Modeling: A U.S. Electricity Market Application

Many critical goods and services in modern-day economies are produced and distributed through complex institutional arrangements. Agent-based computational economics (ACE) modeling tools are capable of handling this degree of complexity. In concrete support of this claim, this study presents an ACE test bed designed to permit the exploratory study of restructured U.S. wholesale power markets with transmission grid congestion managed by locational marginal prices (LMPs). Illustrative findings are presented showing how spatial LMP cross-correlation patterns vary systematically in response to changes in the price responsiveness of wholesale power demand when wholesale power sellers have learning capabilities. These findings highlight several distinctive features of ACE modeling: namely, an emphasis on process rather than on equilibrium; an ability to capture complicated structural, institutional, and behavioral real-world aspects (micro-validation); and an ability to study the effects of changes in these aspects on spatial and temporal outcome distributions. Hongyan Li ABB Inc., Chapel Hill, NC, USA, e-mail: [email protected], Junjie Sun Office of the Comptroller of the Currency, U.S. Treasury, Washington D.C. 20219 USA, e-mail: [email protected], Leigh Tesfatsion (Corresponding Author) Economics Department, Iowa State University, Ames, IA 50011-1070 USA, e-mail: [email protected] This study is scheduled to appear in H. Dawid and W. Semmler (Eds.), Computational Methods in Economic Dynamics, Springer, 2010.