Merchants of Reputation : Privatization Under Elites' Outside Lobbying

An economic elite wants to buy a public asset as cheaply as possible, whose ownership is decided by an incumbent politician who can be of high or low competence. The elite can exert influence through two channels: they can make a take-it-or-leave-it offer for the asset, and they can manipulate the information available to voters about the incumbent's competence. A key innovation of this paper is to consider that the elite's capacity to mobilise information can complement their buying offer: by attacking the incumbent (trying to uncover bad news about his competence before his decision to sell) or threatening him (menacing to uncover bad news if he refuses to sell), the elite can reduce the privatization prices. I show that the elite often (but not always) uses threats against a leading incumbent (one who has better reputation ex-ante than her challenger) and attacks against a trailing one. Surprisingly, I find that a better reputation can actually render an incumbent more susceptible to the elite's influence. The paper also highlights the large distortions induced by the elite's capacity to mobilise information about incumbent politicians