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Optimal Privatization Using Qualifying Auctions

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Author Info
Boone, Jan
Goeree, Jacob K.

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Abstract

This paper explores the use of auctions for privatizing public assets. In our model, a single ‘insider’ bidder (e.g. incumbent management of a government-owned firm) possesses information about the asset’s risky value. In addition, bidders are privately informed about their costs of exploiting the asset. Due to the insider’s presence, uninformed bidders face a strong winner’s curse in standard auctions with devastating consequences for revenues. We show that the optimal mechanism discriminates against the informationally advantaged bidder to ensure truthful information revelation. The optimal mechanism can be implemented via a simple two-stage ‘qualifying auction.’ In the first stage of the qualifying auction, non-binding bids are submitted to determine who enters the second stage, which consists of a standard second-price auction augmented with a reserve price.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5118.

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Date of creation: Jul 2005
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Handle: RePEc:cpr:ceprdp:5118

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Related research
Keywords: information advantage; privatization; qualifying auction; winner's curse;

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October. [Downloadable!] (restricted)
  2. Ángel Hernando Veciana & Michael Tröge, 2005. "The Insider'S Curse," Working Papers. Serie AD 2005-08, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  3. Ye, Lixin, 2007. "Indicative bidding and a theory of two-stage auctions," Games and Economic Behavior, Elsevier, vol. 58(1), pages 181-207, January. [Downloadable!] (restricted)
  4. Angel Hernando-Veciana, 2000. "Successful Uninformed Bidding," Econometric Society World Congress 2000 Contributed Papers 0791, Econometric Society. [Downloadable!]
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  5. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June. [Downloadable!] (restricted)
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  6. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hai Wang & Weidong Zhang & Jingjing Wang, 2007. "Auctioning the state owned enterprise in China: the trade-off between maximizing revenue and minimizing unemployment," Economic Change and Restructuring, Springer, vol. 40(3), pages 267-280, September. [Downloadable!] (restricted)
  2. Ángel Hernando Veciana, 2006. "Information Acquisition In Auctions: Sealed Bids Vs. Open Bids," Working Papers. Serie AD 2006-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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