On the Right-of-First-Refusal
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Sushil Bikhchandani
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.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Advances Article
- Asymmetric Vertical Integration
- Shocks and Business Cycles
- Identification of Preferences from Market Data
- On the Right-of-First-Refusal
- Denial of Death and Economic Behavior
- Contributions Article
- Utility Equivalence in Auctions
- Pollution Taxes for Monopolistically Competitive Firms
- On the Welfare Evaluation of Income and Opportunity
- Inefficiency of Collusion at English Auctions
- Limited Attention as the Bound on Rationality
- Topics Article
- Upward and Downward Limit Pricing: The Role of Post-Entry Competition
- Anonymous Bidding and Revenue Maximization
- Citizen Candidacy With Asymmetric Information
- Likely Events and Possible States
