LARGE SHAREHOLDERS, PRIVATE BENEFITS OF CONTROL, AND OPTIMAL SCHEMES OF PRIVATIZATION

We analyze optimal schemes for privatization of state enterprises when foreign investors are potential buyers. The highest bidders may nob b e the best large shareholders for the state enterprise, since their bi d may reflect only their high private benefit of control. The governme nt finds itself facing a tradeoff between trying to obtain the highest possible payment (the ''revenue'' objective) and identifying the comp any that will operate better in the future (the ''efficiency'' objecti ve). Therefore, ordinary auctions are not appropriate. Our optimal pri vatization schemes in many cases require the use of the number of shar es sold as a crucial instrument to attract the most efficient investor s.