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Abstract

This dissertation examines the creation and catastrophic failure of California’s electricity markets in the period between 1993 and 2001. It looks at this case as an extreme example of failed market design. No longer content to merely describe the world, market designers try to create institutional frameworks that can enforce the idealizing assumptions of economic theory. The dissertation asks why the California markets were built in such a way that they became vulnerable to widespread corporate crime. The first part reconstructs the structural preconditions for the Western energy crisis. It finds that the markets suffered from a self-destructive dynamic that would have pushed the system to the brink of collapse even absent the proximate causes usually stressed by the literature. To understand what prompted the design decisions that triggered this dynamic, I look at three different domains of design work: politics, regulation, and technical implementation. I show that each domain posed unique problems to the realization of the market designers’ vision. In political processes, designers struggled to obtain jurisdiction over decisions that violated the principles of market design. In technical contexts, their decisions suffered from “blindspots” that were embedded in the theoretical blueprints they used in their work. Finally, in regulatory contexts, market designers underestimated the oversight requirements of their market mechanisms. Their silence led regulators to create the monitoring protocols on the basis of a flawed imaging of the new markets. Apart from developing a new explanation of the California energy crisis, the dissertation develops a theoretical perspective on market design work as a form of centralized planning. It argues that the practical design problems go back to an unspoken tension between a mechanistic and an emergentist understanding of markets that is implicit in the intellectual project of market design. This tension calls for contradictory design decisions. Since only a control structure can potentially resolve these contradictions, success and failure of market design ultimately hinges on the requirements for effective market oversight. If the allocation problem requires adaptive, interdependent markets with narrow standards of calculative rationality, these requirements become so extensive that they bring classic problems of centralized planning back into the project. The study is based on extensive archival material from three different archives and seventy-five in-depth interviews.

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