Countertrade offsets in international procurement: Theory and evidence

Abstract

International government procurement is rife with deviations from the perfectly competitive market model and arm’s-length exchange. In the defense, aerospace, capital equipment, automotive, and telecommunications industries, for example, we encounter imperfectly competitive markets. The complexities of high transaction costs, incomplete and asymmetric information, and bounded rationality mark this exchange setting. In this environment, economic theory predicts that markets typically underproduce relative to the socially optimal level, and sellers frequently earn supernormal profits, rents, and quasi-rents.