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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26932
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| Title: | Privatization with Political Constraint: Auctions versus Private Negotiations |
| Authors: | Fluck, Zsuzsanna
John, Kose
Ravid, Abraham S. |
| Issue Date: | 15-Apr-1997 |
| Series/Report no.: | FIN-98-034 |
| Abstract: | This paper investigates the design of privatization mechanisms in
emerging market economies. We identify an emerging market economy by the
political constraints that limit the set of viable privatization
mechanisms. Our objective is to explain the striking diversity of
privatization mechanisms observed in practice and the frequent use of an
apparantly suboptimal privatization mechanism: private negotiation. We
develop a simple model wherein privatization is to be carried out by a
government agent who plays favorites among bidders and is potentially
disciplined by forthcoming elections. We find that it is the degree of
political constraints that determines which mechanism is more successful
in raising funds. If the political environment is such that the
privatization agent himself aims at raising the fair value for the
company, the privatization auctions and private negotiations are equally
successful in raising public revenues. If, however, political
constraints distort the agent's incentives, then one mechanism
outperforms the other. In particular, if the distortion is moderate,
then private negotiations can raise more value for a successful
enterprise than privatization auctions. In this case the agent may play
favorites among bidders, but to the extent he cares about price, he will
use his bargaining power to negotiate his target price. If, however, the
distortion is severe so that the agent lacks sufficient motivation to
raise a fair price for the company, then privatization auctions will
outperform private negotiations. Even though the agent may play
favorites among the bidders, he would not put pressure on the bidders to
raise the price during negotiations. In a privatization auction, in
contrast, the presence of other bidders, regardless how informed they
are, induces competition and places a lower bound on the equilibrium
winning bid. We further find that information disclosure laws may have
negative welfare implications: they may help the privatization agent to
collude with some of the bidders to the disadvantage of noncolluding
bidders. Our theory provides further regulatory implications for
privatization procedures in emerging market economies. |
| URI: | http://hdl.handle.net/2451/26932 |
| Appears in Collections: | Economics Working Papers
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