Legal pre-emption rights as call-options, redistribution and efficiency loss

Michael Møller and Caspar Rose
Additional contact information
Michael Møller: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Caspar Rose: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark

No 2001-8, Working Papers from Copenhagen Business School, Department of Finance

Abstract: We conduct an analysis of legal pre-emption rights in which a beneficiary has a right but not an obligation to acquire a specific good at a certain price. We analyse how such an option influences seller and other prospective buyers. Furthermore, we address the question of the efficiency loss if the option holder cannot use his option and then sell the asset to the person with the highest reservation price. We model a sealed second bid auction with uniformly distributed subjective values. We show that the option leads to an expected loss for the other bidders as well as the seller and a total efficiency loss for society. The efficiency loss is born by the other bidders and amounts to fifty percent of the redistribution from the seller to the person who gets the option. The results are almost similar when introducing bidders with subjective values drawn from a normal distribution.

Keywords: Call-options; Efficiency loss; Redistribution (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2001-12-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://openarchive.cbs.dk/cbsweb/handle/10398/7191 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden (http://openarchive.cbs.dk/cbsweb/handle/10398/7191 [302 Found]--> https://research.cbs.dk/)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:cbsfin:2001_008

Access Statistics for this paper

More papers in Working Papers from Copenhagen Business School, Department of Finance Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Lars Nondal ().