Importance Of Penalties Research Articles

The Importance of Penalties and Pre-qualifications: A Model-based Assessment of the UK Renewables Auction Scheme

This paper assesses the multi-technology auctions for Contracts for Difference (CfDs) in the UK, with a special focus on how pre-qualifications and penalties affect bidders' behaviour, risk aversion and bidding strategies and thus the auction outcomes in terms of prices and project implementation probability. The auctions are modelled to closely represent the auction design foreseen by the implementing agency, the Department for Business, Energy and Industrial Strategy (BEIS). Two alternative designs are presented: In the first one, bidders bid their true costs as a drop-out after being awarded would be penalised. The second one does not include a penalty. In that case, bidders are modelled with a cost function that includes a higher level of uncertainty. The model results show that low pre-qualifications and low or no penalties lead to an increased drop-out of agents after being awarded. For the policy-maker this implies a lower realisation rate for the auctions. Furthermore, the non-penalty case does not yield lower prices compared to a case with a stricter penalty/pre-qualification system in place

Penalty as a component of review strategies for effective enforcement of environmental regulations

The importance of penalties in environmental regulation is systematically assessed using game-theoretic modelling and analysis. A formal game model called the Enforcement Dilemma is used to examine a conflict decision problem in which an operator decides to violate or comply with a regulation, while an environmental agency chooses a strict or a lenient enforcement programme. An efficient enforcement policy based on an innovative co-operative strategy called the review strategy is presented and discussed, and methods to increase its practical effectiveness are considered. Numerical and theoretical results show that, in practice, the review strategy sometimes fails to induce full compliance by the operator. In such instances, a supplemental penalty system can sometimes deter the operator from even low levels of violation. Specifically, the optimal combination of penalty severity and measurement allowance is identified. The main results of this research are that even under mild penalties it is possible to select measurement allowance levels—neither too low nor too high—that induce full compliance by the regulated operator.