Optimal Privatisation Using Qualifying Auctions

Jan Boone and Jacob K. Goeree

Economic Journal, 2009, vol. 119, issue 534, 277-297

Abstract: This article explores use of auctions for privatising public assets. In our model, a single ‘insider’ bidder possesses information about the asset's common value. 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. We show that the optimal mechanism discriminates against the informationally advantaged bidder. It can be implemented via a two‐stage ‘qualifying auction’. In the first stage, 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.

Date: 2009
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