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Economic incentives and international trade

  • Dalia Marin
  • Monika Schnitzer

This paper studies the importance of incentives as a determinant of international trade flows. We argue that barter, countertrade and foreign direct investment can be seen as efficient institutions that mitigate contractual hazards which arise in technology trade, marketing and imperfect capital markets. Paying an import with export goods rather than cash (barter) helps to overcome incentive problems that arise in debt repayment of highly indebted countries. Payment in export goods removes the anonymity of the medium of exchange and thus allows to create a collateral for the creditor. Furthermore, tying an import with an export (countertrade) helps to solve the incentive problems related to the technology transfer to developing countries. The export flow serves as a ’hostage’ that deters cheating on the quality of the imported technology good. The predictions of the two models are consistent with the pattern of trade of actual barter and countertrade contracts.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 42 (1998)
Issue (Month): 3-5 (May)
Pages: 705-716

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Handle: RePEc:eee:eecrev:v:42:y:1998:i:3-5:p:705-716
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  2. Marin, Dalia & Schnitzer, Monika, 1997. "The Economic Institution of International Barter," CEPR Discussion Papers 1658, C.E.P.R. Discussion Papers.
  3. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
  4. Marin, Dalia, 1990. "Tying in International Trade," Munich Reprints in Economics 3114, University of Munich, Department of Economics.
  5. Marin, Dalia, 1990. "Tying in international trade: evidence on countertrade," Munich Reprints in Economics 19226, University of Munich, Department of Economics.
  6. Hans-Peter Lankes & A. J. Venables, 1996. "Foreign direct investment in economic transition: the changing pattern of investments," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(2), pages 331-347, October.
  7. Greif, Avner, 1992. "Institutions and International Trade: Lessons from the Commercial Revolution," American Economic Review, American Economic Association, vol. 82(2), pages 128-33, May.
  8. Chan, Raissa & Hoy, Michael, 1991. "East--West joint ventures and buyback contracts," Journal of International Economics, Elsevier, vol. 30(3-4), pages 331-343, May.
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