Optimal Privatization Using Qualifying Auctions

26 Pages Posted: 10 Aug 2005

See all articles by Jan Boone

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

Jacob K. Goeree

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

This paper explores the use of auctions for privatizing public assets. In our model, a single 'insider' bidder (e.g., incumbent management of a government-owned firm) possesses information about the asset's risky value. In addition, bidders are privately informed about their costs of exploiting the asset. Due to the insider's presence, uninformed bidders face a strong winner's curse in standard auctions with devastating consequences for revenues. We show that the optimal mechanism discriminates against the informationally advantaged bidder to ensure truthful information revelation. The optimal mechanism can be implemented via a simple two-stage 'qualifying auction.' In the first stage of the qualifying auction, non-binding bids are submitted to determine who enters the second stage, which consists of a standard second-price auction augmented with a reserve price.

Keywords: Privatization, qualifying auction, winner's curse, information advantage

JEL Classification: D44, D82, L33

Suggested Citation

Boone, Jan and Goeree, Jacob K., Optimal Privatization Using Qualifying Auctions (July 2005). CEPR Discussion Paper No. 5118, Available at SSRN: https://ssrn.com/abstract=781324

Jan Boone (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2399 (Phone)
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Centre for Economic Policy Research (CEPR)

London
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TILEC ( email )

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Jacob K. Goeree

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/jgoeree.html

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