ABSTRACT
This entry evaluates offset contracts in government procurement. Offsets are reciprocal trade agreements that require the seller to provide extra benefits to the purchasing government's economy as a condition for the sale. Despite being labeled as inefficient and trade distorting, offset contracts have gained popularity in recent years and have been adopted by a majority of governments in the world. Since institutions, industries, and resource capacity differ widely across countries, governments considering offsets for international procurement should evaluate the efficiency trade-offs between arm's-length exchange in markets, offsets, and other policies. This entry reviews the existing literature and presents some of the important theoretical and empirical findings. Mandatory procurement policies that require offsets for all government procurement above a particular threshold are found to be detrimental to the country's welfare. In other instances, offsets can serve as an efficient use of government oligopsony power to reduce transaction costs and promote industrialization and economic development.
