DP1541 Methods of Privatization: Auctions, Bargaining and Give-Aways

Author(s): Klaus M. Schmidt, Monika Schnitzer
Publication Date: January 1997
Keyword(s): Eastern Europe, Expropriation, Mass Privatization, Political Economy
JEL(s): C78, D44, D72
Programme Areas: Industrial Organization, Transition Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1541

The paper surveys recent results of auction theory, bargaining theory and political economy in order to compare different methods of privatization. We assume that a government is not only interested in maximizing revenues from privatization, but also in achieving an efficient allocation of ownership rights. We show that these two goals may conflict with each other. We argue that in a wide variety of circumstances the government should use an ascending open bid format, however, such as the traditional English auction. In particular, if there are more than two serious bidders, an English auction is more efficient and yields higher revenues than bargaining with a preselected buyer. Finally, if the government has to mass privatize, we show that giving away some fraction of all shares to the general population may be more efficient and yield higher revenues than a policy of selling all firms to the highest bidder.