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On the Right-of-First-Refusal

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Author Info

  • Bikhchandani Sushil

    ()
    (UCLA)

  • Lippman Steven A.

    ()
    (UCLA)

  • Ryan Reade

    ()
    (Amaranth, LLC)

Abstract

When the seller of an asset grants a right-of-first-refusal to a buyer, this special buyer has the opportunity to purchase the asset at the best price the seller can obtain from the other potential buyers. We show that the right-of-first-refusal is inefficient, and it benefits the special buyer at the expense of the seller and other buyers. In a private values model, the benefit the special buyer obtains via the right-of-first-refusal equals the cost to the seller. When buyers' valuations are correlated, the presence of a special buyer exacerbates the winner's curse on regular buyers. Consequently, the special buyer's expected gain from the right-of-first-refusal is often less than the expected loss to the seller. Thus, our analysis suggests that the seller should exercise considerable caution prior to deciding whether to grant this right to a buyer.

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File URL: http://www.degruyter.com/view/j/bejte.2005.5.1/bejte.2005.5.1.1194/bejte.2005.5.1.1194.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 5 (2005)
Issue (Month): 1 (April)
Pages: 1-44

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Handle: RePEc:bpj:bejtec:v:advances.5:y:2005:i:1:n:4

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Web page: http://www.degruyter.com

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Cited by:
  1. Grosskopf, Brit & Roth, Alvin E., 2009. "If You are Offered the Right of First Refusal, Should You Accept? An Investigation of Contract Design," Scholarly Articles 4261988, Harvard University Department of Economics.
  2. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "Simultaneous vs. sequential price competition with incomplete information," Economics Letters, Elsevier, vol. 104(1), pages 23-26, July.
  3. Karine Brisset & François Cochard & François Maréchal, 2012. "The Value of a Right of First Refusal Clause in a Procurement First-Price Auction," Working Papers 2012-03, CRESE.
  4. Leandro Arozamena & Federico Weinschelbaum, 2010. "On Favoritism in Auctions with Entry," Working Papers 103, Universidad de San Andres, Departamento de Economia, revised May 2010.
  5. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "The effect of corruption on bidding behavior in first-price auctions," European Economic Review, Elsevier, vol. 53(6), pages 645-657, August.
  6. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.
  7. Thomas, Charles J., 2011. "Vertical mergers in procurement markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 200-209, March.
  8. Lengwiler, Yvan & Wolfstetter, Elmar, 2010. "Auctions and corruption: An analysis of bid rigging by a corrupt auctioneer," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1872-1892, October.
  9. Elisabetta Iossa & Federico Antellini Russo, 2008. "Potenzialità e criticità del Partenariato Pubblico Privato in Italia," Rivista di Politica Economica, SIPI Spa, vol. 98(3), pages 125-158, May-June.
  10. repec:ebl:ecbull:v:4:y:2006:i:24:p:1-5 is not listed on IDEAS
  11. Hua, Xinyu, 2012. "The right of first offer," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 389-397.

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