Recapturing Information Rents Through Partial and Gradual Privatization
Posted: 10 Aug 2001
Date Written: June 2001
Rather than completely privatizing all firms at once, most governments start by selling only some firms and/or by selling only a fraction of each firm. We show that both approaches increase privatization revenues by publicly revealing information on firm profitability to prospective buyers. Selling only a partial share of each firm allows the state to sell the remaining share once the firm has begun restructuring and the long-term profitability of the firm is more clear. Similarly, selling only some firms initially allows the remaining firms to be sold once the post-privatization performance of firms sold earlier has already been observed. In either case the extra information makes bidding more competitive, reducing buyer information rents and raising privatization revenues. The state therefore faces a tradeoff between privatizing rapidly to reveal more information about firm performance to buyers, and privatizing slowly to avoid giving away information rents before the information is revealed. Partial privatization and gradual privatization are able to balance these objectives so as to maximize revenues.
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