Machiavellian Privatization

41 Pages Posted: 15 Jan 2001

See all articles by Enrico C. Perotti

Enrico C. Perotti

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

Bruno Biais

Centre for Economic Policy Research (CEPR)

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Abstract

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

Perotti, Enrico C. and Biais, Bruno, Machiavellian Privatization. Available at SSRN: https://ssrn.com/abstract=254276 or http://dx.doi.org/10.2139/ssrn.254276

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

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HOME PAGE: http://www.fee.uva.nl/fm/people/pero.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Bruno Biais

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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