If you are offered the Right of First Refusal,should you accept? An investigation of contract design |
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| Authors: | Brit Grosskopf Alvin E. Roth |
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| Affiliation: | 1. Texas A&M University, USA;2. Harvard Business School and Department of Economics, Harvard University, USA;1. Department of Computer Science, City University of Hong Kong, Hong Kong;2. Institute of Information Science, Academia Sinica, Taiwan;3. Department of Computer Science, Hong Kong Baptist University, Hong Kong;1. Louis Stokes Cleveland Veterans Affairs Medical Center, Cleveland, OH 44106, USA;2. Department of Biomedical Engineering, Cleveland Clinic, Cleveland, OH 44195, USA;3. Department of Vascular Surgery, Cleveland Clinic, Cleveland, OH 44195, USA;4. Novant Health, 1915 Randolph Road, Charlotte, NC 28207, USA;1. Department of Economics, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK;2. Reports & Forecasts Division, Minnesota Department of Human Services, PO Box 64996, St. Paul, MN 55164-0996, USA |
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| Abstract: | 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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