A RENT EXTRACTION THEORY OF RIGHT OF FIRST REFUSAL <link rid="fn21">-super-* </link>

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. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.