Zsuzsanna Fluck, Kose John, S. Abraham Ravid
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.
Fluck: (212) 998-0341 zfluck@stern.nyu.edu
John: (212) 998-0337 kjohn@stern.nyu.edu
Ravid: (973) 353-5540
To request a copy of this paper click here
The Finance Department Working Paper Series has been generously sponsored
by