Divide et Impera: Strategic Underpricing in Privatizations

Pio Baake and Jörg Oechssler

Public Choice, 2001, vol. 108, issue 3-4, 207-22

Abstract: In several recent initial public offerings in privatization cases shares seemed to be severely underpriced. In this paper we provide a political economy explanation for this apparent underpricing. Using a variant of Grossmann and Helpmann's (1996) model of special interest politics, we demonstrate that governments may raise their election chances by rationing investors because the resulting broader distribution of shares makes regulation that is favorable to the privatized firm more popular. Somewhat surprisingly, even revenues from the privatization can be increased through rationing. The model also explains the common practice of bonus systems designed to prevent investors from taking profits immediately. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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