Barter Relationships

The Vanishing Rouble, Barter Networks and Non-Monetary Transactions in Post-Soviet Societies, Paul Seabright, Ed., Cambridge University Press, 2000

Posted: 18 Feb 2014  

Lars Stole

University of Chicago - Booth School of Business

Canice Prendergast

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: October 1, 1999

Abstract

We offer a simple economic model of repeated barter to explore current economic exchange in Russia: individuals trade with each other in a dynamic environment where the threat of dissolving the relationship constrains the incentives to cheat. We show how the value of future interactions affects the willingness of individuals to trade with each other; only when rates of interaction are large can trust compensate for an absence of money. Moreover, when trading relationships are asymmetric – either in the trading partners' values for each other's goods or in their relative bargaining power – the resulting barter allocations are distorted, as goods must be used for liquidity reasons. When third-party middlemen exist who can facilitate barter, they command a premium for their services, and have preferences for improved liquidity which may or may not correspond with the other traders in the barter economy. Fourth, we demonstrate that the restriction of trading to tight trading networks may be a socially efficient response to insufficient barter interactions. Finally, we consider how liquidity constraints affect pricing, and illustrate how the existence of a barter market can mute incentives to change prices in response to credit crunches.

Keywords: Contract theory, Incentives

JEL Classification: C70, D82

Suggested Citation

Stole, Lars and Prendergast, Canice, Barter Relationships (October 1, 1999). The Vanishing Rouble, Barter Networks and Non-Monetary Transactions in Post-Soviet Societies, Paul Seabright, Ed., Cambridge University Press, 2000. Available at SSRN: https://ssrn.com/abstract=2397331

Lars A. Stole (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7309 (Phone)
773-702-0458 (Fax)

Canice Prendergast

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7309 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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