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Auctions, Real Options Valuation, And Privatization

Author

Listed:
  • ALAA EL-SHAZLY

    (Department of Economics, Faculty of Economics and Political Science, Cairo University, Cairo 12211, Egypt)

Abstract

This article studies competitive bidding by strategic investors to buy enterprises that are being privatized through sealed-bid auctions. The bidders use a real options approach to enterprise valuation that accounts for asset quality given their private information. It is shown that the optimal bidding strategy under first-price sealed-bid auctions defines a Bayesian Nash equilibrium in which each strategic investor bids only a fraction of its prior valuation and competition decreases the bidder's profit margin. The greater the transparency and information disclosure on asset quality, the higher the seller's expected receipts will be.

Suggested Citation

  • Alaa El-Shazly, 2011. "Auctions, Real Options Valuation, And Privatization," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 403-415.
    • Handle: RePEc:wsi:igtrxx:v:13:y:2011:i:04:n:s0219198911003064
    DOI: 10.1142/S0219198911003064
    as

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    References listed on IDEAS

    as
    1. Megginson, William Leon, 2005. "The Financial Economics of Privatization," OUP Catalogue, Oxford University Press, number 9780195150629, Decembrie.
    2. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721.
    3. David Parker & David Saal (ed.), 2003. "International Handbook on Privatization," Books, Edward Elgar Publishing, number 2330.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Auctions and bidding; real options; Bayesian Nash equilibrium; privatization; C61; C72; D44; L33;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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