Recapturing Information Rents Through Partial and Gradual Privatization

Posted: 10 Aug 2001

See all articles by Nandini Gupta

Nandini Gupta

Indiana University - Kelley School of Business - Department of Finance

Rick Harbaugh

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Indiana University - Department of Economics

Date Written: June 2001

Abstract

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.

Suggested Citation

Gupta, Nandini and Harbaugh, Rick, Recapturing Information Rents Through Partial and Gradual Privatization (June 2001). Available at SSRN: https://ssrn.com/abstract=279006

Nandini Gupta (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3416 (Phone)
812-855-5875 (Fax)

Rick Harbaugh

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-2777 (Phone)
812-855-3354 (Fax)

HOME PAGE: http://www.bus.indiana.edu/riharbau/

Indiana University - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
457
PlumX Metrics