Working Paper: CEPR ID: DP891
Authors: Francesca Cornelli; David D. Li
Abstract: We analyze optimal schemes for privatization in a transitional economy. In many cases, established Western firms are good candidates for large shareholders of a local firm, since the sale of the shares can generate large amount of revenues and furthermore, in the future, the home country can free-ride on the efficiency improvement of the firm. However, not all Western firms are good owners. Some of them are more interested in the private benefit of control than the potential of efficiency improvement. Such Western firms are bad owners in the long run, although they may well be willing to pay a high price to obtain the control right. Assuming that the government cares about a convex combination of sales revenue and the future value of the firm, we show that the optimal scheme is dependent upon the magnitude of the control benefit. Moreover, we show that the number of shares sold is a crucial instrument to attract the most efficient company.
Keywords: East European privatization; optimal auctions; private benefits of control
JEL Codes: D44; G32; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government's choice of how many shares to sell (G38) | Efficiency of the firm post-privatization (L33) |
| Higher number of shares sold (G24) | Better outcomes by attracting more efficient bidders (D44) |
| Optimal scheme contingent on magnitude of control benefits (D61) | Optimal number of shares sold (G24) |
| Government's choice of how many shares to sell (G38) | Balance between revenue maximization and efficiency (H21) |