AUCTIONS, REAL OPTIONS VALUATION, AND PRIVATIZATION

Alaa El-Shazly ()
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Alaa El-Shazly: Department of Economics, Faculty of Economics and Political Science, Cairo University, Cairo 12211, Egypt

International Game Theory Review (IGTR), 2011, vol. 13, issue 04, 403-415

Abstract: This article studies competitive bidding by strategic investors to buy enterprises that are being privatized through sealed-bid auctions. The bidders use a real options approach to enterprise valuation that accounts for asset quality given their private information. It is shown that the optimal bidding strategy under first-price sealed-bid auctions defines a Bayesian Nash equilibrium in which each strategic investor bids only a fraction of its prior valuation and competition decreases the bidder's profit margin. The greater the transparency and information disclosure on asset quality, the higher the seller's expected receipts will be.

Keywords: Auctions and bidding; real options; Bayesian Nash equilibrium; privatization; C61; C72; D44; L33 (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1142/S0219198911003064

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