A new institutional economic analysis of offset arrangements in government procurement

Date of Completion

January 2001


Economics, Theory|Political Science, Public Administration




This dissertation analyzes offset arrangements in government procurement. Offsets are nonstandard contracts that oblige a foreign seller to provide extra benefits to the purchasing government's economy as a condition for the sale of goods and services. In many instances, governments prefer to realize these benefits in the form of in-kind-transfer instead of bargaining for discounts of the sale price. I employ the theoretical tools of the new institutional economics to explain why governments are electing to leave the price margin for some types of purchases, and to determine under what economic settings offsets are an efficient policy instrument. The new institutional economics approach is well suited for this study because it highlights three factors—transaction costs, asymmetric information, and bounded rationality—that figure prominently in government procurement of high technology goods and services. ^ In chapter 2, I define offset and examine the contractual attributes of the arrangement. Using these definitions, I then provide an historical account of offset arrangements since the 1930s. This chapter describes how governments have modified the structure of offsets continually to accommodate different objectives. ^ Chapters 3 and 4 develop the core theory and policy implications of the dissertation. Chapter 3 introduces a model that demonstrates how offset arrangements may support exchange by reducing transaction costs. In chapter 4, I present a policy matrix that offers general guidelines for procurement officers considering offsets. This study will probably be of practical value to the 130 governments currently experimenting with offsets. An important finding is that mandatory offset programs are advised only for a subset of government purchases. ^ In chapter 5, I introduce an empirical model to test recent theoretical claims in the literature. Using a rich data set of three years of offset transactions, I estimate an econometric model that supports the view that offsets are the outcome of transaction cost economizing and political economy variables. Chapter 6 is a case study of the state of Maryland's offset program. It affords us the opportunity to examine potential strategies for firms facing large offset obligations. ^