On the Right - of - first - refusal ∗

When the seller of an asset grants a right-of-first-refusal to a buyer, this special buyer has the opportunity to purchase the asset at the best price the seller can obtain from the other potential buyers. We show that the right-of-first-refusal is inefficient, and it benefits the special buyer at the expense of the seller and other buyers. In a private values model, the benefit from granting a right-of-first-refusal to the special buyer equals the cost to the seller. When buyers’ valuations are correlated, the presence of a special buyer exacerbates the winner’s curse on regular buyers. Consequently, if some of the regular buyers do not participate in the price discovery stage, the expected gain from granting a right-of-first-refusal to the special buyer is often less than the expected loss to the seller. JEL Classification Numbers: D4, L11, L14.