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The right of first offer

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  • Hua, Xinyu

Abstract

This paper examines the right of first offer, which requires a seller to bargain with the contracted buyer before subsequent buyers arrive. The contract also prevents the seller from selling his unique asset to subsequent buyers at a price below what he offers to the contracted buyer. The right of first offer makes the seller less aggressive in bargaining with the contracted buyer, who is privately informed about his valuation. Such a contract can reduce inter-temporal misallocation, in which a subsequent buyer gets the asset when the contracted buyer has higher valuation. But it also may cause misallocation in which the contracted buyer gets the asset when subsequent buyers have higher valuations. Overall, whether the right of first offer can increase the joint surplus for the seller and the contracted buyer, as well as social welfare, depends on the contracted buyer's renegotiation power and the distribution of the buyers’ valuations. This paper also discusses the differences between the right of first offer and the most-favored-customer clause.

Suggested Citation

  • Hua, Xinyu, 2012. "The right of first offer," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 389-397.
    • Handle: RePEc:eee:indorg:v:30:y:2012:i:4:p:389-397
    DOI: 10.1016/j.ijindorg.2012.01.002
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    References listed on IDEAS

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    Cited by:

    1. Guo, Di & Hua, Xinyu & Jiang, Kun, 2017. "Agency and strategic contracts: Theory and evidence from R&D agreements in the pharmaceutical industry," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 37-64.

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    More about this item

    Keywords

    Right of first offer; Misallocation; Rent seeking; Renegotiation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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