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If you are offered the Right of First Refusal, Should you accept? An Investigation of Contract Design

  • Brit Grosskopf
  • Alvin E. Roth

Rights of first refusal are contract clauses intended to provide the holder of a license or lease with some protection when the contract ends. The simplest version gives the right holder the ability to act after potential competitors. However, another common implementation requires the right holder to accept or reject some offers before potential competitors are given the same offer, and, if the right holder rejects the initial offer, allows the right to be exercised affirmatively only if competitors are subsequently offered a better deal (e.g. a lower price). We explore, theoretically and experimentally, the impact this latter form of right of first refusal can have on the outcome of negotiation. Counterintuitively, this "right" of first refusal can be disadvantageous to its holder. This suggests that applied contract design may benefit from the same kind of attention to detail that has begun to be given to practical market design.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000001017.

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Date of creation: 13 Jan 2006
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Handle: RePEc:cla:levrem:122247000000001017
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  1. John H. Kagel & Alvin E. Roth, 2000. "The Dynamics Of Reorganization In Matching Markets: A Laboratory Experiment Motivated By A Natural Experiment," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 201-235, February.
  2. Roth, Alvin & Ünver, M. Utku & Sönmez, Tayfun, 2004. "Kidney Exchange," Scholarly Articles 2580565, Harvard University Department of Economics.
  3. Alvin E Roth & Richard A Posner & Christine Jolls & Christopher Avery, 2007. "The New Market for Federal Judicial Law Clerks," Levine's Bibliography 843644000000000288, UCLA Department of Economics.
  4. Roth, Alvin & Ockenfels, Axel & Ariely, Dan, 2005. "An Experimental Analysis of Ending Rules in Internet Auctions," Scholarly Articles 2579649, Harvard University Department of Economics.
  5. Grether, David M & Plott, Charles R, 1984. "The Effects of Market Practices in Oligopolistic Markets: An Experimental Examination of the Ethyl Case," Economic Inquiry, Western Economic Association International, vol. 22(4), pages 479-507, October.
  6. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-81, September.
  7. Ernst Fehr & Klaus M. Schmidt, . "A Theory of Fairness, Competition and Cooperation," IEW - Working Papers 004, Institute for Empirical Research in Economics - University of Zurich.
  8. Roth, Alvin & Niederle, Muriel, 2005. "The Gastroenterology Fellowship Market: Should There Be A Match?," Scholarly Articles 2562766, Harvard University Department of Economics.
  9. Muriel Niederle & Alvin E. Roth, 2003. "Unraveling Reduces Mobility in a Labor Market: Gastroenterology with and without a Centralized Match," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1342-1352, December.
  10. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  11. Roth, Alvin E & Xing, Xiaolin, 1994. "Jumping the Gun: Imperfections and Institutions Related to the Timing of Market Transactions," American Economic Review, American Economic Association, vol. 84(4), pages 992-1044, September.
  12. repec:cup:cbooks:9780521551847 is not listed on IDEAS
  13. Roth, Alvin E. & Vesna Prasnikar & Masahiro Okuno-Fujiwara & Shmuel Zamir, 1991. "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study," American Economic Review, American Economic Association, vol. 81(5), pages 1068-95, December.
  14. Schnitzer, Monika, 1994. "Dynamic duopoly with best-price clauses," Munich Reprints in Economics 3108, University of Munich, Department of Economics.
  15. 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.
  16. Gneezy, Uri & Haruvy, Ernan & Roth, Alvin E., 2003. "Bargaining under a deadline: evidence from the reverse ultimatum game," Games and Economic Behavior, Elsevier, vol. 45(2), pages 347-368, November.
  17. C. Nicholas McKinney & Muriel Niederle & Alvin E. Roth, 2005. "The Collapse of a Medical Labor Clearinghouse (and Why Such Failures Are Rare)," American Economic Review, American Economic Association, vol. 95(3), pages 878-889, June.
  18. Atila Abdulkadiroğlu & Parag A. Pathak & Alvin E. Roth & Tayfun S�nmez, 2005. "The Boston Public School Match," American Economic Review, American Economic Association, vol. 95(2), pages 368-371, May.
  19. Alvin E. Roth & Tayfun S�nmez, 2005. "A Kidney Exchange Clearinghouse in New England," American Economic Review, American Economic Association, vol. 95(2), pages 376-380, May.
  20. repec:cup:cbooks:9780521536721 is not listed on IDEAS
  21. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
  22. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  23. Alvin E. Roth & Tayfun Sonmez & M. Utku Unver, 2004. "Pairwise Kidney Exchange," NBER Working Papers 10698, National Bureau of Economic Research, Inc.
  24. Pathak, Parag A. & Abdulkadiroglu, Atila & Roth, Alvin, 2005. "The New York City High School Match," Scholarly Articles 2562765, Harvard University Department of Economics.
  25. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation for Research in Economics, Yale University.
  26. Alvin E. Roth, 2002. "The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics," Econometrica, Econometric Society, vol. 70(4), pages 1341-1378, July.
  27. Charles A. Holt & David T. Scheffman, 1987. "Facilitating Practices: The Effects of Advance Notice and Best-Price Policies," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 187-197, Summer.
  28. Posner, Richard A. & Avery, Christopher & Jolls, Christine & Roth, Alvin, 2001. "The Market for Federal Judicial Law Clerks," Scholarly Articles 2623748, Harvard University Department of Economics.
  29. Robert Slonim & Alvin E. Roth, 1998. "Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic," Econometrica, Econometric Society, vol. 66(3), pages 569-596, May.
  30. Roth, Alvin E, 1984. "The Evolution of the Labor Market for Medical Interns and Residents: A Case Study in Game Theory," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 991-1016, December.
  31. Brit Grosskopf, 2003. "Reinforcement and Directional Learning in the Ultimatum Game with Responder Competition," Experimental Economics, Springer, vol. 6(2), pages 141-158, October.
  32. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
  33. Roth, Alvin E. & Erev, Ido, 1995. "Learning in extensive-form games: Experimental data and simple dynamic models in the intermediate term," Games and Economic Behavior, Elsevier, vol. 8(1), pages 164-212.
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