Auctioning the state owned enterprise in China: the trade-off between maximizing revenue and minimizing unemployment

Abstract

In the SOE privatization auctions in China, there are many conflicting factors the government has to concern about, such as maximizing the auction revenue and minimizing the induced unemployment. This paper constructs the first price bidding with employment constraint to take both criteria into account. By adding that the winner is required to settle down a certain quantity of former SOE employees in the new enterprise, this mechanism brings on the competition among prospective investors in both the price and the quantity of employment, which can help the government to balance the different objectives efficiently. However, the constraint will function properly only under the condition that the government has stressed sufficiently on the employees’ rearrangement and set the best employment threshold. Meanwhile, if the government specifies an explicit compensation standard for the induced lay-offs to eliminate investors’ accommodating cost dispersion or introduces more strategic investors with considerable heterogeneity to participate in the bidding, its dual-objective can be better equilibrated.