Working Paper: CEPR ID: DP2014
Authors: Bruno Biais; Enrico C. Perotti
Abstract: We analyse politically motivated privatization design in a bipartisan environment where politicians lack commitment power. Suppose the median class voters a priori favour redistributive policies. If the privatization programme succeeds in allocating enough shares to these citizens, they become averse to redistributive policies, which would be detrimental to the values of their shareholdings. To induce the median class voters to buy enough shares to shift their political preferences, underpricing is often necessary. The more unequal the society, the poorer the median class, the less willing they are to buy shares, the larger the necessary underpricing. When inequalities are large this leads to voucher privatization. Shifting the preferences of the middle class by privatizing is impossible when strong ex-ante political constraints require large upfront transfers to insiders, reducing the value which may be distributed through the privatization programme, or when social inequality is extreme.
Keywords: privatization; political economy; underpricing; political risk; elections
JEL Codes: G32; H30; P26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Underpricing (D49) | Increased share acquisition by the median class (G34) |
| Increased share acquisition by the median class (G34) | Shift in political preferences towards market-oriented policies (E65) |
| Degree of income inequality (D31) | Willingness of the median class to buy shares (G19) |
| Higher income inequality (D31) | Greater underpricing necessary for participation (D41) |
| Significant allocation of shares to the median class (D30) | Shift in preferences towards supporting right-wing policies (E65) |
| Privatization (L33) | Political feasibility contingent on underpricing (H43) |