Privatization and Book-building
by
Filippo Vergara Caffarelli
European University Institute

This paper sets up and analyses a game-theoretic model of book-building and contrasts findings with empirical evidence. The book-building procedure is a sale mechanism employed for institutional share offers on the stock market. This paper presents a game-form that leads to some results which match the observed evidence. Different versions of this game-form are studied with the most interesting results found in the game with symmetric information and in the game with asymmetric information on the common value of the shares. High over-subscription and underpricing are found in the equilibria of these games. In all the equilibria of the game with symmetric information, bids are rationed. A weak dominance characterisation of the equilibria is provided. This is the first game-theoretic model of book-building which analyses the strategic interaction among buyers and seller allowing for general bids from buyers. The model also endogenises seller's allocation- and pricing-decision. Thus, it better represents both real-world timing in the game and the actual strategic interaction of the players.

Date received: June 20, 2000

Copyright © 2000 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Mathematical Conference Abstracts. Document # cafk-19.