Disorganization and Financial Collapse

Abstract:     
Since the fall of communism, the former Soviet Union experienced a strong output decline and a dramatic increase in arrears and barter. We develop a model which explains how these three phenomena are connected. We introduce liquidity and credit constraints into a model of disorganization and show how these problems can alleviate the hold-up problem. We argue further that barter creates a hostage that allows to deal with disorganization when credit enforcement becomes prohibitively costly. Based on a firm survey in Ukraine in 1997, we test how input shortages, financial shortages and barter affect output growth of firms.

Keywords: Transition, Financial crisis, Output fall, Credit constraint, Barter

JEL Classification: G3, P3, D2, O1

Accepted Paper Series