If you are offered the Right of First Refusal, should you accept? An investigation of contract design

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.

[1]  Muriel Niederle,et al.  The gastroenterology fellowship Match: how it failed and why it could succeed once again. , 2004, Gastroenterology.

[2]  Alvin E. Roth,et al.  Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic , 1998 .

[3]  Alvin E. Roth,et al.  An Experimental Analysis of Ending Rules in Internet Auctions , 2003 .

[4]  Gary E. Bolton,et al.  ERC: A Theory of Equity, Reciprocity, and Competition , 2000 .

[5]  Paul Milgrom,et al.  Putting Auction Theory to Work , 2004 .

[6]  E. Fehr.  A Theory of Fairness, Competition and Cooperation , 1998 .

[7]  A. Roth,et al.  Unraveling Reduces Mobility in a Labor Market: Gastroenterology with and without a Centralized Match , 2003, Journal of Political Economy.

[8]  Robert B. Wilson,et al.  Research Paper Series Graduate School of Business Stanford University Architecture of Power Markets Architecture of Power Markets 1 , 2022 .

[9]  S. Bikhchandani,et al.  On the Right-of-First-Refusal , 2002 .

[10]  A. Roth,et al.  The Gastroenterology Fellowship Market: Should There Be a Match? , 2005, The American economic review.

[11]  V. Smith.  Bargaining and Market Behavior , 2000 .

[12]  Parag A. Pathak,et al.  The Boston Public School Match , 2005 .

[13]  Brit Grosskopf.  Reinforcement and Directional Learning in the Ultimatum Game with Responder Competition , 2003 .

[14]  Alvin E. Roth,et al.  Bargaining under a deadline: evidence from the reverse ultimatum game , 2003, Games Econ. Behav..

[15]  M. Utku Ünver,et al.  A Kidney Exchange Clearinghouse in New England. , 2005, The American economic review.

[16]  Marcel Kahan.  An Economic Analysis of Rights of First Refusal , 1999 .

[17]  J. Kagel,et al.  Handbook of Experimental Economics , 1997 .

[18]  ' MonikaSchnitzer,et al.  Dynamic duopoly with best-price clauses , 2005 .

[19]  A. Roth.  The Evolution of the Labor Market for Medical Interns and Residents: A Case Study in Game Theory , 1984, Journal of Political Economy.

[20]  A. Roth.  The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics , 2002 .

[21]  Charles A. Holt,et al.  Facilitating Practices: The Effects of Advance Notice and Best-Price Policies , 1987 .

[22]  A. Roth,et al.  Learning in Extensive-Form Games: Experimental Data and Simple Dynamic Models in the Intermediate Term* , 1995 .

[23]  W. Güth,et al.  An experimental analysis of ultimatum bargaining , 1982 .

[24]  S. Zamir,et al.  Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study , 1991 .

[25]  J. Kagel,et al.  The Dynamics of Reorganization in Matching Markets: A Laboratory Experiment Motivated by a Natural Experiment , 2000 .

[26]  Parag A. Pathak,et al.  The New York City High School Match , 2005 .

[27]  Urs Fischbacher,et al.  z-Tree - Zurich toolbox for readymade economic experiments: experimenter's manual , 1999 .

[28]  D. Walker.  Rethinking Rights of First Refusal , 1999 .

[29]  Oriol Carbonell-Nicolau.  Games and Economic Behavior , 2011 .

[30]  Christine Jolls,et al.  The Market for Federal Judicial Law Clerks , 2007 .

[31]  A. Roth,et al.  Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria , 1998 .

[32]  U. Fischbacher.  z-Tree: Zurich toolbox for ready-made economic experiments , 1999 .

[33]  Charles R. Plott,et al.  The Effects of Market Practices in Oligopolistic Markets: An Experimental Examination of the Ethyl Case , 1984 .

[34]  A. Roth,et al.  Jumping the Gun: Imperfections and Institutions Related to the Timing of Market Transactions , 1994 .