Direct offsets in international trade as a remedy for asymmetric information

Abstract

PurposeThe main purpose of this paper is to investigate whether purchases of capital goods through direct offset transactions (OTs) could be a more beneficial form of trade than conventional market transactions (MTs).Design/methodology/approachAn original model of trade is offered where a company from a less‐developed country plans to acquire an advanced technology embodied in capital goods from a developed country's firm. The quality of technology is unknown to the buyer. The model is used to analyse the choice of transactional form made by the purchasing firm.FindingsIt is shown that, in the case of substantial uncertainty about the quality of the acquired technology, direct offsets could be the preferred form of exchange. Direct OTs serve as an insurance against the technology of low quality. They become a credible signal of capital goods' quality in the situation of asymmetric information between the seller and the buyer. It is a rational reaction to market imperfections.Practical implicationsThe findings imply that, under asymmetric information about the quality of acquired technology, the rational decision makers should replace the conventional MTs with the direct offsets.Originality/valueThe results of the paper contribute to the discussion on the motivation for the use of direct offsets as a transactional form of international trade. The paper should be of interest to practitioners as well as to academics specialising in international business transactions.