IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_6445.html
   My bibliography  Save this paper

Offset Contracts as an Insurance Device in Building the National Security

Author

Listed:
  • Vesa Kanniainen
  • Juha-Matti Lehtonen

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.

Suggested Citation

  • Vesa Kanniainen & Juha-Matti Lehtonen, 2017. "Offset Contracts as an Insurance Device in Building the National Security," CESifo Working Paper Series 6445, CESifo.
    • Handle: RePEc:ces:ceswps:_6445
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6445.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
    2. Caves, Richard E & Marin, Dalia, 1992. "Countertrade Transactions: Theory and Evidence," Economic Journal, Royal Economic Society, vol. 102(414), pages 1171-1183, September.
    3. Fulvio Castellacci & Arne Fevolden, 2014. "Capable Companies or Changing Markets? Explaining the Export Performance of Firms in the Defence Industry," Defence and Peace Economics, Taylor & Francis Journals, vol. 25(6), pages 549-575, December.
    4. Jurgen Brauer & John Paul Dunne, 2011. "Arms Trade Offsets: What Do We Know?," Chapters, in: Christopher J. Coyne & Rachel L. Mathers (ed.), The Handbook on the Political Economy of War, chapter 13, Edward Elgar Publishing.
    5. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    6. Hennart, Jean-Francois & Anderson, Erin, 1993. "Countertrade and the Minimization of Transaction Costs: An Empirical Examination," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 290-313, October.
    7. Rolf Mirus & Bernard Yeung, 1986. "Economic Incentives for Countertrade," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 17(3), pages 27-39, September.
    8. Carol Petersen, 2011. "Defense and Commercial Trade Offsets: Impacts on the U.S. Industrial Base Raise Economic and National Security Concerns," Journal of Economic Issues, Taylor & Francis Journals, vol. 45(2), pages 485-492.
    9. Christopher J. Coyne & Rachel L. Mathers (ed.), 2011. "The Handbook on the Political Economy of War," Books, Edward Elgar Publishing, number 13385.
    10. Kanniainen, Vesa & Mustonen, Jussi, 1989. "Balanced trade under uncertainty: A multiperiod non-cooperative game approach," European Journal of Political Economy, Elsevier, vol. 5(1), pages 113-123.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ewa Baranowska-Prokop & Jacek Prokop, 2007. "Dyskryminacja cenowa a transakcje wiązane," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 67-84.
    2. Kim, Jin Yeub, 2017. "Interim third-party selection in bargaining," Games and Economic Behavior, Elsevier, vol. 102(C), pages 645-665.
    3. Jacek Prokop & Ewa Baranowska-Prokop, 2006. "Asymetria informacji a transakcje wiązane," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 7-8, pages 9-25.
    4. Guth, Werner & Ritzberger, Klaus & van Damme, Eric, 2004. "On the Nash bargaining solution with noise," European Economic Review, Elsevier, vol. 48(3), pages 697-713, June.
    5. Volodymyr Babich & Simone Marinesi & Gerry Tsoukalas, 2021. "Does Crowdfunding Benefit Entrepreneurs and Venture Capital Investors?," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 508-524, March.
    6. Ley, Eduardo, 2006. "Statistical inference as a bargaining game," Economics Letters, Elsevier, vol. 93(1), pages 142-149, October.
    7. Yu, Shasha & Lei, Ming & Deng, Honghui, 2023. "Evaluation to fixed-sum-outputs DMUs by non-oriented equilibrium efficient frontier DEA approach with Nash bargaining-based selection," Omega, Elsevier, vol. 115(C).
    8. Herbst, Luisa & Konrad, Kai A. & Morath, Florian, 2017. "Balance of power and the propensity of conflict," Games and Economic Behavior, Elsevier, vol. 103(C), pages 168-184.
    9. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    10. Iraklis Kollias & John Leventides & Vassilios G. Papavassiliou, 2024. "On the solution of games with arbitrary payoffs: An application to an over‐the‐counter financial market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1877-1895, April.
    11. Takeuchi, Ai & Veszteg, Róbert F. & Kamijo, Yoshio & Funaki, Yukihiko, 2022. "Bargaining over a jointly produced pie: The effect of the production function on bargaining outcomes," Games and Economic Behavior, Elsevier, vol. 134(C), pages 169-198.
    12. Lili Liu & Guochun Tang & Baoqiang Fan & Xingpeng Wang, 2015. "Two-person cooperative games on scheduling problems in outpatient pharmacy dispensing process," Journal of Combinatorial Optimization, Springer, vol. 30(4), pages 938-948, November.
    13. Hwang, Sung-Ha & Rey-Bellet, Luc, 2021. "Positive feedback in coordination games: Stochastic evolutionary dynamics and the logit choice rule," Games and Economic Behavior, Elsevier, vol. 126(C), pages 355-373.
    14. Eric van Damme & Xu Lang, 2022. "Two-Person Bargaining when the Disagreement Point is Private Information," Papers 2211.06830, arXiv.org, revised Jan 2024.
    15. Cédric Wanko, 2008. "Approche Conceptuelle et Algorithmique des Equilibres de Nash Robustes Incitatifs," Working Papers 08-03, LAMETA, Universtiy of Montpellier, revised Feb 2008.
    16. Jacob Engwerda & Davoud Mahmoudinia & Rahim Dalali Isfahani, 2016. "Government and Central Bank Interaction under Uncertainty: A Differential Games Approach," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(2), pages 225-259, Spring.
    17. R. Harrison Wagner, 1979. "On The Unification of Two-Person Bargaining Theory," Journal of Conflict Resolution, Peace Science Society (International), vol. 23(1), pages 71-101, March.
    18. Eran Hanany & D. Marc Kilgour & Yigal Gerchak, 2007. "Final-Offer Arbitration and Risk Aversion in Bargaining," Management Science, INFORMS, vol. 53(11), pages 1785-1792, November.
    19. Shiran Rachmilevitch, 2022. "Pre-bargaining Investment Implies a Pareto Ranking of Bargaining Solutions," Group Decision and Negotiation, Springer, vol. 31(4), pages 769-787, August.
    20. Walter Trockel, 2015. "Axiomatization of the discrete Raiffa solution," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 9-17, April.

    More about this item

    Keywords

    offsets; national security; defence material; insurance;
    All these keywords.

    JEL classification:

    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_6445. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.