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Barter relationships

Author

Listed:
  • Prendergast, Canice
  • Stole, Lars

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.

Suggested Citation

  • Prendergast, Canice & Stole, Lars, 2000. "Barter relationships," MPRA Paper 33400, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33400
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    File URL: https://mpra.ub.uni-muenchen.de/33400/1/MPRA_paper_33400.pdf
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    References listed on IDEAS

    as
    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-851, September.
    3. Canice Prendergast & Lars Stole, 2001. "Barter, Liquidity and Market Segmentation," CESifo Working Paper Series 586, CESifo.
    4. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    5. Telser, L G, 1980. "A Theory of Self-enforcing Agreements," The Journal of Business, University of Chicago Press, vol. 53(1), pages 27-44, January.
    6. Prendergast, Canice & Stole, Lars, 1999. "Restricting the means of exchange within organizations," European Economic Review, Elsevier, vol. 43(4-6), pages 1007-1019, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Wendy Carlin & Steven Fries & Mark Schaffer & Paul Seabright, 2000. "Barter and Non-Monetary Transactions in Transition Economies: Evidence from a Cross-Country Survey," CERT Discussion Papers 0004, Centre for Economic Reform and Transformation, Heriot Watt University.
    2. Isabel Pla Julián, 2003. "Cambios institucionales en la economía rusa: de las reformas de mercado a la consolidación monetaria," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 5(8), pages 66-91, January-J.
    3. Canice Prendergast & Lars Stole, 2001. "Barter, Liquidity and Market Segmentation," CESifo Working Paper Series 586, CESifo.

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    More about this item

    Keywords

    Barter; non-monetary exchange;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • F10 - International Economics - - Trade - - - General

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