Droop control is a key strategy for operating islanded microgrid systems. The droop settings of the different distributed generation (DG) units in an islanded microgrid determine the operational characteristics of the island. This paper presents an algorithm for choosing the optimal droop parameters for islanded microgrids with wind generation in order to minimize the overall island generation costs in the absence of a microgrid central controller (MGCC). A detailed microgrid model is adopted to reflect the special features and operational characteristics of droop controlled islanded microgrid systems. The proposed problem formulation considers the power flow constraints, voltage and frequency regulation constraints, line capacity constraints and unit capacity constraints. Numerical case studies have been carried out to show the effectiveness of the proposed algorithm as compared to conventional droop parameter selection criteria typically adopted in the literature. (C) 2014 Elsevier Ltd. All rights reserved.