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Machiavellian Underpricing

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Author Info
Biais, Bruno
Perotti, Enrico C

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2014.

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Date of creation: Nov 1998
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Handle: RePEc:cpr:ceprdp:2014

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Keywords: Elections Political Economy Political Risk Privatization Underpricing

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy

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  1. Börner, Kira, 2004. "The Political Economy of Privatization," Discussion Papers in Economics 296, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
  2. Perotti, Enrico C & van Oijen, Pieter, 1999. "Privatization, Political Risk and Stock Market Development," CEPR Discussion Papers 2243, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Bertocchi, Graziella & Spagat, Michael, 1999. "The Politics of Cooptation," CEPR Discussion Papers 2156, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Gerard Rpland, 2001. "The Political Economy of Transition," William Davidson Institute Working Papers Series 413, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  5. Wolfgang Aussenegg, 1999. "Going Public in Poland: Case-by-Case Privatizations, Mass Privatization and Private Sector Initial Public Offerings," William Davidson Institute Working Papers Series 292, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  6. Enrico C. Perotti & Pieter van Oijen, 1999. "Privatization, Political Risk and Stock Market Development in Emerging Economies," Tinbergen Institute Discussion Papers 99-033/2, Tinbergen Institute. [Downloadable!]
    Other versions:
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