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Optimal Privatization Using Qualifying Auctions

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  • Boone, Jan
  • Goeree, Jacob K.

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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Bibliographic Info

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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References

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  1. Professor Paul Klemperer, 2000. "What Really Matters in Auction Design," Microeconomics 0004008, EconWPA.
  2. Hernando-Veciana, Angel, 2004. "Successful uninformed bidding," Games and Economic Behavior, Elsevier, vol. 48(1), pages 29-53, July.
  3. Angel Hernando-Veciana & Michael Tröge, 2005. "The Insider's Curse," Microeconomics 0503012, EconWPA.
  4. Kagel, John & Pevnitskaya, Svetlana & Ye, Lixin, 2008. "Indicative bidding: An experimental analysis," Games and Economic Behavior, Elsevier, vol. 62(2), pages 697-721, March.
  5. Paul Klemperer & Jeremy Bulow, 1998. "Toeholds and Takeovers," Economics Series Working Papers 1998-W04, University of Oxford, Department of Economics.
  6. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Ye, Lixin, 2007. "Indicative bidding and a theory of two-stage auctions," Games and Economic Behavior, Elsevier, vol. 58(1), pages 181-207, January.
  8. 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.
  9. Larson, Nathan, 2009. "Private value perturbations and informational advantage in common value auctions," Games and Economic Behavior, Elsevier, vol. 65(2), pages 430-460, March.
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Cited by:
  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.
  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).
  3. Kagel, John & Pevnitskaya, Svetlana & Ye, Lixin, 2008. "Indicative bidding: An experimental analysis," Games and Economic Behavior, Elsevier, vol. 62(2), pages 697-721, March.
  4. Jan Boone & Roy Chen & Jacob Goeree & Angelo Polydoro, 2009. "Risky procurement with an insider bidder," Experimental Economics, Springer, vol. 12(4), pages 417-436, December.

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