A Rent Extraction Theory of Right of First Refusal

13 Pages Posted: 20 May 2009

See all articles by Albert H. Choi

Albert H. Choi

University of Michigan Law School

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Abstract

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.

Suggested Citation

Choi, Albert H., A Rent Extraction Theory of Right of First Refusal. The Journal of Industrial Economics, Vol. 57, Issue 2, pp. 252-262, June 2009, Available at SSRN: https://ssrn.com/abstract=1407314 or http://dx.doi.org/10.1111/j.1467-6451.2009.00377.x

Albert H. Choi (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

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