Braun Large-scale Privatization via Auctions

Transcription

1 Braun Large-scale Privatization via Auctions

2 GABLER EDITION WISSENSCHAFT Kasseler Wirtschafts- und Verwaltungswissenschaften; Band 7 Herausgegeben von Dr. Heinz Hübner, Dr. Jürgen Reese, Dr. Peter Weise und Dr. udo Winand, Univ. -Professoren des Fachbereiches Wirtschaftswissenschaften, Universität-Gh Kassel Die Schriftenreihe dient der gebündelten Darstellung der vielfältigen wissenschaftlichen Aktivitäten des Fachbereichs Wirtschaftswissenschaften der Universität-Gh Kassel. Er umfaßt die Fachgebiete Betriebswirtschaftslehre, Volkswirtschaftslehre, Verwaltungswissenschaft und Wirtschaftsinformatik. Die Reihe ist jedoch auch offen für die Veröffentlichung von Arbeiten aus "verwandten" Fachgebieten und Ergebnissen aus interdisziplinären Projekten mit ausgeprägtem Bezug zu ökonomischen Fragestellungen.

3 Jocelyn Braun Large-scale Privatization via Auctions The case of land in transforming economies With a foreword by Prof. Dr. Ra i ner Stöttner DeutscherUniversitäts Verlag

4 Die Deutsche Bibliothek - CIP-Einheitsaufnahme Braun, Jocelyn: large-scale Privatization via Auctions : the case of land in transforming economies /Jocelyn Braun. With a foreword by Rainer Stottner. - Wiesbaden : Dt. Univ.-Verl. ; Wiesbaden : Gabler, 1998 (Kasseler Wirtschafts- und Verwaltungswissenschaften ; Bd. 7) (Gabler Edition Wissenschaft) Zugl.: Kassel, Univ., Diss., 1998 ISBN ISBN (ebook) DOI / Alle Rechte vorbehalten. Gabler Verlag, Deutscher UniversitCits-Verlaa, Wiesbaden Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, Wiesbaden, 1998 Der Deutsche UniversitCits-Veriag und der Gabler Verlag sind Unternehmen der Bertelsmann Fachinformation GmbH. Das Werk einschlie/3lich aller seiner Teile ist urheberrechtlich aeschjjtzt. Jede Verwertung au/3erhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlag~~ unzulcissig und strafbar. Das gilt insbesondere fur VervielFaltigungen, ubersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Haehste inhaltliche und technische Qualitat unserer Produkte ist unser ZieI. Bei der Produktion und Auslieferung unserer Bjjcher wollen wir die Umwelt schonen: Dieses Buch ist auf saurefreiem und chlorfrei gebleichtem Papier gedruckt. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, da/3 solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten wăren und daher von jedermann benutzt werden djjrften. lektorat: Ute Wrasmann / Brigitte Knoringer ISBN

5 Foreword The collapse of socialist economies has demonstrated the superiority of market-driven economies historically. The market economy has by no means established itself as a reliable and never-erring problem-solving device in a broad social and economic context. However, "capitalism", as the market-driven economic system is sometimes called with an ideological twist, still lacks a clear-cut and unambiguous structure. Among others, there seems to be a clear evidence of market failures resulting from a variety of causes. For example, the market mechanism may be "blind" with respect to the social and environmental needs of the society, thus stifling social welfare in the long run. Moreover, private enterprise does not easily lend itself to the production of public goods because the lack of the exclusion principle invites free rider attitudes. In 1989, formerly socialist economies, especially in Eastern Europe, suddenly lost their so far seemingly solid social, economic and judicial foundations; the "capitalist" system offering itself as the only alternative. Nobody could be really happy with the sudden upheaval that posed many questions and practically offered no answers. It was quite clear that market structures could not replace the former socialist structures within an eye' s wink, and without any specific modifications. But which modifications would seem fit, taking into account the special circumstances of a country? How quickly should the transformation process be implemented? Was the "big bang" method or the gradual method to be preferred? In the first case, there would be risks of jeopardizing the transformation, mainly by losing the support of the broad general public threatened by the collapse of familiar economic and social structures. In the second case, the co-existence of incompatible elements, namely the socialist and capitalist elements of social and economic organizations, would lead to losses in efficiency and in the emotional drive behind the transformation process. The work presented here addresses one special aspect of the transformation problem, namely the privatization of agricultural land on the territory of the former socialist countries. The author provides a theoretical and empirical treatment of this special aspect by embedding it in the complex causal structures of transformation and privatization theory. She is able to identify auctions as the most efficient mechanism to implement large-scale privatization schemes. These, in turn, constitute an v

6 indispensable pre-condition of a successful transfonnation. Thus, focusing on the privatization of agricultural land does not restrict the generalization of the theoretical argument to all sorts of privatization projects. The author has founded her reasoning on solid theoretical grounds. Mechanism design theory, as outlined by W. Vickrey in the early sixties and further developed by L. Hurwicz and R.B. Myerson, plays a central role in her theoretical argument. The plain and simple question in transforming economies just boils down to the following: How can a system of economic incentives be implemented in such a way that optimal decisions under uncertainty emerge? Ms. Braun fmds that auctions provide a superior mechanism in setting off large-scale privatization projects. In addition, Ms. Braun draws heavily upon the "neo-institutionalist" or principal agent theories provided by G. A. Akerlof, M.C. Jensen, W.H. Meckling, D.M. Jaffee, T. Russel, B.R. Holmström, O.E. Williamson and others. The author hereby is paying tribute to the fact that privatization measures pose a variety of typical principal-agent problems. The relationship between the state and the buyers, the principal being the state pursuing the privatization scheme and the agent being the potential buyer of assets that so far have been in public ownership, clearly stand in a principal agent environment: The principal tries to make sure that the agent will secure the utmost benefit for society by utilizing the privatized asset. The agent, however, may try and cheat the principal as to his true type; thus the principal's choice may lead to adverse selection problems. Moreover, the agent may do a lazy and dismal job yielding to the temptations of moral hazard after assigning the contract. The author successfully shows that the auction mechanism proves to be superior, because it urges the agent to reveal honestly his or her merits as weil as his or her weaknesses. The principal-agent problem is embedded in the broader theoretical context of asymmetric infonnation. The author demonstrates that a large part of the transfonnation problem essentially consists of problems of asymmetric infonnation. In case of privatization measures, the parties engaging on the scheme practically know very little of each other. The efficiency and smoothness of the transfonnation process will very much depend upon the degree of mitigating infonnational asymmetry. In the worst of all cases, contracting would not be possible because of the parties distrusting each other. The author once again demonstrates impressively that the best solution to the problem of asymmetric infonnation lies on a fair and sufficiently transparent VI

7 contractual mechanism. Once again, auctions are best suited to clear up the playing field of the contractual parties because they urge the bidder - - the agent - - to reveal his or her willingness to pay. In his/her own best interest, he/she will reveal his/her willingness to pay, otherwise risking not winning the auction. Signaling the highest willingness to pay is at least indicative of the ability of making the most productive use of the privatized asset. Putting the asset to its most productive use means maximizing social welfare. Thus, auctions seem to be the mechanism that guarantees welf are maximization. Moreover, the author uses the game-theoretic approach in order to derive her conclusions. The government can be seen as a principal trying to engage others, the agents, via privatization, to do its job of social welf are maximization. Viewed from a game-theoretic perspective, the principal as weil as the agent(s) want to emerge from the game as winners. The government wants to make sure that social welf are will be maximized; the private owner, on the other hand, wants to maximize his private utility. Existing informational deficits on both sides create the temptation of cheating for both parties. Anybody taking part in the game is aware of this. In order to minimize any potential loss in playing the game, each party is interested in reducing informational deficits. Each party will try to induce the counterparty to reveal its private knowledge, thereby also revealing the motives behind each party's actions. This, by the way, makes it perfecdy clear that the information problem can only be solved by establishing a meehanism that leads to effieient eontraeting. Finally, it should be stressed that the author develops her argument in fair distance to the neoclassieal paradigm of market equilibrium, whieh is based on conditions of perfect information. Her analysis is stricdy intertwined with the game-theoretie background, showing how an auction-based privatization should be modeled adequately by foeusing on the strategie eomponent of the mechanism. At the same time, the reasoning has to take proper account of the fact that privatization works under the conditions of imperfect information. For this reason, the author employs the equilibrium analysis ofthe Bayesian-Nash type. Ms. Braun outlines her arguments and derives her results on a high level of strict eeonomic reasoning. She provides a thorough and deep insight into the privatization problems to be encountered in all transforming economies. Thus, her work eontributes to closing a gap in our eurrent knowledge of transformation eeonomies. At the same VII

8 time, she takes an honest stand by making perfectly clear the limits of her approach. These refer especially to the fact that value judgements and personal biases of the bidder may not be modeled. For example, the possibility of a purely efficiencyoriented market economy leading to discrepancies between individual and social welf are cannot be dismissed in any way. But, as the author correctly stresses, we practically do not have any acceptable alternative. Discouraging private initiative and entrepreneurship by letting administrative regulations proliferate cannot be the answer of a market economy. If privatization leads to social and economic effects not generally accepted, the market mechanism will have to react and produce better solutions. Thus, the market economy proves to rest on a self-organizing process that has been time-tested. The work of Ms. Braun takes the reader to the frontier of research in transformation and privatization economics. Based on a concise outline of the state of the art of all relevant fields of economic theory, she shows the way to as yet poorly investigated territory, and even beyond. Rainer Stöttner VIII

9 Preface When I was searching for an appropriate research topic, the idea to take up something new and exciting brought me to game-theoretic models. At the time, my knowledge of auctions was limited to the institutions I have always seen selling artworks. In short, I have practically never heard of auction theory, till I started to search for literature on sell-off mechanisms. Getting deeper into the topic of auctions and mechanism design was made easier by the scholarly environment I was lucky to be part of at the Chair of Prof. Dr. Wilhelm Brandes of the Institute of Agricultura1 Economics, University of Goettingen. With the help of colleagues, the topic has evolved into a research project on land privatization via auctioning, which was funded by the Deutsche Forschungsgemeinschaji. The Workshop on Economic Theory at the Institute has helped me focus my thinking regarding my analysis in many ways. From the initial emphasis on the land privatization problems in the former East Germany, the research has taken a holistic perspective by going beyond the borders to the ex-socialist countries of Eastern Europe. This has also helped the research considerably weh since the sticky political economy issues that has bogged down the East German land privatization program has been contained into manageable levels in the analysis, allowing a greater focus on the relevance of the design process in privatizing highly political resources in light of economic transformation. Having the research done at the University of Goettingen in conjunction with the close supervision of Prof. Dr. Rainer Stoettner at the Faculty of Economics and Business, University of Kassel has created an interesting perspective in the research as it appears now in this book. I am grateful for the opportunity to have had the regular discussions with Prof. Stoettner and his staff. These had been truly fruitful and encouraging in keeping on with the seemingly unending and sometimes frustrating task of writing. As is always the case, there are many people to thank. but I feel that some very special ones need to be mentioned. At the University of Goettingen, I would like to express my gratitude to my coheagues and/or ex-colleagues Dr. Alfons Balmann, Prof. Dr. Tilman Becker, Thomas Berger, Dr. Hans-Joachim Budde, Ludger Hinners-Tobrägel, Dr. Heinrich Hockmann, Dr. Guido Recke, Dr. Hans-Peter Weikard, as well as Wolf gang Peinemann and Martina Reichmann. IX

10 At the University of Kassel, thanks are due to Sophie Robe, Karin Hoppstaedter, Jochen Dittmar, Norbert MueIler, and Barbara Jung, as weil as the two other members ofmy Ph.D. defense panel, Prof. Dr. Peter Weise and PD Dr. Thomas Eger. Last but not least is of course the gratitute to my family, Andreas, Margaux and - perhaps the greater achievement during the struggle towards the completion of the Ph.D.- Baby Benedict. Die moralische Unterstützung ist gelungen! Jocelyn Braun x

11 Table of Contents 1. INTRODUCTION: OVERVIEW OF THE PROBLEMS AND ISSUES IN TRANSFORMATION MACROECONOMIC LEVEL ISSUES Grawth and Development Employment and other social aspects Investments The role of government MrCROECONOMIC ISSUES Efficiency of state-owned vs. private enterprises Property rights and incentives THE ROLE OF PRIVATIZATION IN 1RANSFORMING ECONOMIES The task involved Policies and goals PRIVATIZATION: CONCEPT, THEORY, ISSUES AND EXPERIENCES REASONS FOR PRIVATIZATION Political and social reasons Economic Reasons Normative economic arguments OTHER THEORIES OF PRIVATIZATION Economic Legal Regulation MEruODS OF PRIVATIZATION PRELIMINARY ASSESSMENT OF THE RESULTS OF PRIVATIZATION ACTIVITIES ISSUES IN THE PRIVATIZATION OF LAND IN 1RANSFORMING ECONOMIES Farm restructuring Valuation of land andfarm assets Parcelization, synergies, and economies of scale Political, institutional and legal problems A case in point: East German land privatization Other transforming economies OBJECTIVES AND SCOPE OF THE STUDY ANAL YTIC FRAMEWORK MECHANISM DESIGN AND AUCTION THE THEORY OF INCENTIVES AND MECHANISM DESIGN THE NATURE OF INFORMATION INFORMATION ASYMMETRY AND THE P-A PROBLEM The Moral Hazard Problem The Adverse Selection Problem The role ofincentives XI

12 4.3 THE THEoRYOFMEcHANISMDESIGN Informationally decentralized mechanisms: existence and uniqueness The Revelation principle and the Myerson-Satterthwaite theorem Problems in equilibrium: ex-post, ex-ante, and interim equilibrium concepts Privatization Mechanism and the P-A problem AUCTION MECHANISMS THE STATIC BA YESIAN GAME AND THE BA YESIAN-NASH EQUILIBRIUM CONCEPT THE SINGLE UNIT AUCTION GAME: THE BENCHMARK MODEL The jirst-price sealed bid auction The second price sealed bid auction The Dutch auction The English auction EFFECTSOFRISKAVERSION SALEsREVENUE No reservation fees With reservation fees AFFILIATED V ALUATION AND THE WINNER'S CURSE The winner 's curse A generalization: the affiliated values model MULTlPLE-UNIT AUCTIONS Independent private values model The common value auction AUCTIONS IN PRIVATIZATION OVERVIEW THE P-A PROBLEM REVISITED RECENTEXPERIENCES Small scale auctioning Large Scale AUCTION FOR PRIV ATIZING LAND Experiences Potentials Is auctioning equitable? MODELING AN AUCTION MECHANISM FOR LAND DESIGNCONSIDERATIONS Principol-agent problems in land privatization Informational Requirements Pricing Problems MULTIPLE-UNIT AUCTION OF LAND Generalfeatures Simultaneous vs. sequential auction Multi-stage ascending auction EFFECTSOFRESTRICTIONSINLANDPRIVATIZATION XII

13 8. SUMMARY AND CONCLUSIONS: ISSUES AND IMPLICA TIONS IN THE USE OF AUCTIONS FORLAND PRIVATIZATION EcONOMIC EFFICIENCY AND OVERALL WELF ARE EFFECTS lNFORMATIONALBURDEN FINANCIALASPECTS EQUITY AND FAIRNESS PRIVATE LAND MARKET DEVELOPMENT POLITICAL, INSTITUTIONAL, ANDLEGALASPECTS ZUSAMMENFASSUNG REFERENCES XIII

14 List of Tables Table 2.1 Methods of privatization Table 2.2. Status of transfonnation of selected ex-socialist economies to market economy Table 2.3. Budget accounts of selected transfonning economies, (in national currency and percent of GDP) Table 2.4. Transfers from West Gennany to East Gennany. (in Billion DM), and budget deficit of the Treuhand Table 2.5. Share ofprivate farms and their average size List of Figures Figure 2.1 Schematic diagram of the BVVG process according to the EALG xv