Machiavellian underpricing

We analyze politically motivated privatization design in a bi-partisanenvironment where politicians lack commitment power. Suppose the medianclass voters textit{a priori} favor redistributive policies. If theprivatization program succeeds in allocating enough shares to thesecitizens, they become averse to redistributive policies, which wouldbedetrimental to the values of their shareholdings. To induce themedian classvoters to buy enough shares to shift their political preferences,underpricing is often necessary. The more unequal the society, the poorerthe median class, the less willing they are to buy shares, the largerthe necessary underpricing. When inequalities are large this leads tovoucher privatization. Shifting the preferences of the middle class byprivatizing is impossible when strong ex--ante political constraints requirelarge upfront transfers to insiders, reducing the value which may bedistributed through the privatization program, or when social inequality isextreme.