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On the Right-of-First-Refusal

Author

Listed:
  • 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.

Suggested Citation

  • Bikhchandani Sushil & Lippman Steven A. & Ryan Reade, 2005. "On the Right-of-First-Refusal," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 5(1), pages 1-44, April.
  • Handle: RePEc:bpj:bejtec:v:advances.5:y:2005:i:1:n:4
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    Citations

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    Cited by:

    1. Roberto Burguet & Martin K. Perry, 2009. "Preferred suppliers in auction markets," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 283-295.
    2. Thomas, Charles J., 2011. "Vertical mergers in procurement markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 200-209, March.
    3. Grosskopf, Brit & Roth, Alvin E., 2009. "If you are offered the Right of First Refusal, should you accept? An investigation of contract design," Games and Economic Behavior, Elsevier, vol. 65(1), pages 176-204, January.
    4. repec:eee:indorg:v:54:y:2017:i:c:p:37-64 is not listed on IDEAS
    5. 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.
    6. 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.
    7. Arozamena, Leandro & Weinschelbaum, Federico, 2011. "On favoritism in auctions with entry," Economics Letters, Elsevier, vol. 110(3), pages 265-267, March.
    8. Hua, Xinyu, 2012. "The right of first offer," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 389-397.
    9. 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.
    10. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "Simultaneous vs. sequential price competition with incomplete information," Economics Letters, Elsevier, vol. 104(1), pages 23-26, July.
    11. 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.
    12. repec:ebl:ecbull:v:4:y:2006:i:24:p:1-5 is not listed on IDEAS
    13. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.

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