Machiavellian Privatization

35 Pages Posted: 15 Jan 2001

See all articles by Bruno Biais

Bruno Biais

Centre for Economic Policy Research (CEPR)

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR)


We analyze politically-motivated privatization design in a bipartisan environment where politicians lack commitment power. When the median class favors redistributive policies, a strategic privatization program allocating them enough shares can induce a voting shift away from left wing parties whose policy would reduce the values of shareholdings. To induce median class voters to buy enough shares to shift political preferences, strategic rationing and underpricing is often necessary. In the extreme, this may lead to free share distribution and voucher privatization. Shifting voting preferences becomes impossible when strong ex-ante political constraints require large upfront transfers to insiders, reducing the value which may be distributed through the privatization program, or when social inequality is extreme.

Keywords: privatization, underpricing, political economy, re-election, IPOs, political risk

JEL Classification: G31

Suggested Citation

Biais, Bruno and Perotti, Enrico C., Machiavellian Underpricing (January 1998). Available at SSRN: or

Bruno Biais

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)


Centre for Economic Policy Research (CEPR)

United Kingdom

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