41 Pages Posted: 15 Jan 2001
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: Suggested Citation