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First-Purchase Rights: Rights of First Refusal and Rights of First Offer

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  • Marcel Kahan
  • Shmuel Leshem
  • Rangarajan K. Sundaram

Abstract

This paper analyzes rights of first refusal and rights of first offer in a multiple-buyer, sequential bargaining setting. A right of first refusal entitles the right-holder to purchase a subject asset on the same terms as those accepted by a third party. A right of first offer requires a seller to first offer the right-holder to buy a subject asset and prohibits the seller from subsequently selling the asset to a third party on better terms than those offered to the right-holder. We examine when and how such rights yield benefits to, or impose costs, on the right-holder and the seller. We show that a right of first refusal transfers value from other buyers to the right-holder, but may also force the seller to make suboptimal offers. A right of first offer induces the seller to lower his first-period offer, which will tend to increase the net surplus to the seller and right-holder, but also forces the seller to make suboptimal subsequent offers. We find conditions under which it is in the ex ante interest of the seller and the right-holder to contract for a right of first refusal or a right of first offer, respectively. Copyright 2012, Oxford University Press.

Suggested Citation

  • Marcel Kahan & Shmuel Leshem & Rangarajan K. Sundaram, 2012. "First-Purchase Rights: Rights of First Refusal and Rights of First Offer," American Law and Economics Review, American Law and Economics Association, vol. 14(2), pages 331-371.
    • Handle: RePEc:oup:amlawe:v:14:y:2012:i:2:p:331-371
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    File URL: http://hdl.handle.net/10.1093/aler/ahs014
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    Cited by:

    1. Isenhardt, Lars & Seifert, Stefan & Huettel, Silke, 2021. "On the price effect of a right-of-first-refusal in farmland auctions," 95th Annual Conference, March 29-30, 2021, Warwick, UK (Hybrid) 312053, Agricultural Economics Society - AES.

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