Auctioning Off with a Split Mind: Privatization Under Political Constraints

Abstract

When privatizing, governments have conflicting objectives, like raising revenues and minimizing induced unemployment. We construct two mechanisms that take into account both criteria: a first-score auction in which bidders bid both in terms of price and retained excess labor, and a first-price auction in which bidders bid only over price but they also commit to keep a predetermined by the government number of employees. When bidders differ in their costs of accommodating excess labor, the resulting competition softens, and governments may optimally want to appear strong against labor redundancies. In the first auction this is done by setting a scoring rule that does not correspond to their genuine preferences, and in the second by announcing a smaller labor requirement. Nonetheless, such policies require strong commitment ability.