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Privatization of real options

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  • Pennings, Enrico

Abstract

Many privatization objects have characteristics of real options in the sense that a substantial investment is required in order to make the asset productive while at the same time there is uncertainty about the future value of the asset. This paper explores several auction designs for the privatization of such assets and shows how government revenues depend on the auction designs. As a benchmark, the paper analyzes revenues from an auction with cash only. It is demonstrated that a bid that includes a bidding firm's pledged investments at the time of investment as to stimulate regional development is inferior to a cash only bid. Investments which are made compulsory by the government at the time of the actual investment or retained shareholding by the government, both announced before the auction, can augment the government's payoff. Journal of Comparative Economics 36 (3) (2008) 489-497.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 36 (2008)
Issue (Month): 3 (September)
Pages: 489-497

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Handle: RePEc:eee:jcecon:v:36:y:2008:i:3:p:489-497

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Web page: http://www.elsevier.com/locate/inca/622864

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Keywords: Privatization Real options Ownership Restructuring;

References

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  1. Demougin, Dominique & Sinn, Hans-Werner, 1993. "Privatization, Risk-Taking, and the Communist Firm," CEPR Discussion Papers 743, C.E.P.R. Discussion Papers.
  2. John G. Riley, 1986. "Ex Post Information in Auctions," UCLA Economics Working Papers 367, UCLA Department of Economics.
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  8. Cunningham, Christopher R., 2006. "House price uncertainty, timing of development, and vacant land prices: Evidence for real options in Seattle," Journal of Urban Economics, Elsevier, vol. 59(1), pages 1-31, January.
  9. William L. Megginson & Robert C. Nash & Jeffry M. Netter & Annette B. Poulsen, 2004. "The Choice of Private Versus Public Capital Markets: Evidence from Privatizations," Journal of Finance, American Finance Association, vol. 59(6), pages 2835-2870, December.
  10. Mathias Dewatripont & Gérard Roland, 1995. "The design of reform packages under uncertainty," ULB Institutional Repository 2013/9607, ULB -- Universite Libre de Bruxelles.
  11. Grosfeld, Irena & Roland, Gérard, 1995. "Defensive and Strategic Restructuring in Central European Enterprises," CEPR Discussion Papers 1135, C.E.P.R. Discussion Papers.
  12. Jan Svejnar, 2002. "Transition Economies: Performance and Challenges," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 3-28, Winter.
  13. Saul Estrin, 2002. "Competition and Corporate Governance in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 101-124, Winter.
  14. Alberto Moel, 2002. "When Are Real Options Exercised? An Empirical Study of Mine Closings," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 35-64, March.
  15. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
  16. Slade, Margaret E., 2001. "Valuing Managerial Flexibility: An Application of Real-Option Theory to Mining Investments," Journal of Environmental Economics and Management, Elsevier, vol. 41(2), pages 193-233, March.
  17. Katz, Barbara G. & Owen, Joel, 2000. "Choosing between Big-Bang and Gradualist Reforms: An Option Price Approach," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 95-107, March.
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