Machiavellian underpricing

We analyze politically motivated privatization design in a bipartisan environment where politicians lack commitment power. We consider the case where the median class voters a priori favor redistributive policies. A strategic privatization program, allocating enough shares to these citizens, induces them to become averse to electing parties which would reduce the values of their shareholdings. To induce the median class voters to buy enough shares to shift their political preferences, underpricing is often necessary. The more unequal the society, the poorer the median class, the less willing they are to buy shares, the larger the necessary underpricing. When inequalities are large this can lead to voucher privatization. Shifting the preferences of the middle class by privatizing is impossible when strong exqante political constraints require large upfront transfers to insiders, reducing the value which may be distributed through the privatization program, or when social inequality is extreme.