A Rent Extraction Theory of Right of First Refusal
Albert H. Choi
University of Virginia School of Law
The Journal of Industrial Economics, Vol. 57, Issue 2, pp. 252-262, June 2009
When a seller encumbers a property with a right of first refusal, whenever a third party offers to purchase the property, the right-holder can acquire the property by simply matching the third party's offer. I model the right as a modified auction where the right-holder gets to observe the third party's bid before making his own. I show that, compared to the standard auctions, the right increases the joint profit of the seller and the right-holder by reducing the third party's profit. This result is independent of whether the third party is aware of the right's existence and whether the right creates a welfare loss.
Number of Pages in PDF File: 13Accepted Paper Series
Date posted: May 20, 2009
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