Incentivizing Truth-Telling in MPC-based Load Frequency Control

We present a mechanism for socially efficient implementation of model predictive control (MPC) algorithms for load frequency control (LFC) in the presence of self-interested power generators. Specifically, we consider a situation in which the system operator seeks to implement an MPC-based LFC for aggregated social cost minimization, but necessary information such as individual generators' cost functions is privately owned. Without appropriate monetary compensation mechanisms that incentivize truth-telling, self-interested market participants may be inclined to misreport their private parameters in an effort to maximize their own profits, which may result in a loss of social welfare. The main challenge in our framework arises from the fact that every participant's strategy at any time affects the future state of other participants; the consequences of such dynamic coupling has not been fully addressed in the literature on online mechanism design. We propose a class of real-time monetary compensation schemes that incentivize market participants to report their private parameters truthfully at every time step, which enables the system operator to implement MPC-based LFC in a socially optimal manner

Optimal Dynamic Nonlinear Income Taxes with No Commitment

We wish to study optimal dynamic nonlinear income taxes. Do real world taxes share some of their features? What policy prescriptions can be made? We study a two period model, where the consumers and government each have separate budget constraints in the two periods, so income cannot be transferred between periods. Labor supply in both periods is chosen by the consumers. The government has memory, so taxes in the first period are a function of first period labor income, whereas taxes in the second period are a function of both first and second period labor income. The government cannot commit to future taxes. Time consistency is thus imposed as a requirement. The main results of the paper show that time consistent incentive compatible two period taxes involve separation of types in the first period and a differentiated lump sum tax in the second period, provided that the discount rate is high or utility is separable between labor and consumption. In the natural extension of the Diamond (1998) model with quasi-linear utility functions to two periods, an equivalence of dynamic and static optimal taxes is demonstrated, and a necessary condition for the top marginal tax rate on first period income is found.Optimal Income Taxation; Time Consistency; Incentive Compatibility; Sequential Information Revelation; Optimal Dynamic Taxation