Offset Contracts as an Insurance Device in Building the National Security

Vesa Kanniainen and Juha-Matti Lehtonen

No 6445, CESifo Working Paper Series from CESifo

Abstract: A dynamic multi-stage decision-theoretic approach is introduced to establish the optimal offset and its incidence, the contract price arising from bargaining, and the scale of the acquisition. A new rationale is suggested for offsets in terms of their role as an insurance devise. Results are derived for the pricing of delivery contracts subject to offset claims and their national security implications. It is shown that the national security is strictly convex in the offset transaction. As to the incidence of the offset, the offset claim is shown to be capitalised in the delivery price. The bargaining price is shown to depend on the value of the product to be delivered for the national security, the relative negotiation power of the contracting partners and the social cost of public funds. The analysis highlights the expectation effects of offsets on the bargaining price and the scale of delivery. The results aid in explaining why offsets are widely used in procurement contracts for defence materiel. As they contribute to the national security, they should be allowed to survive and not be denied under competition laws.

Keywords: offsets; national security; defence material; insurance (search for similar items in EconPapers)
JEL-codes: H12 H56 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cta and nep-ias
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Related works:
Journal Article: Offset Contracts as an Insurance Device in Building the National Security (2019)
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