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Barter, Liquidity and Market Segmentation

  • Canice Prendergast
  • Lars Stole

This paper explores the private and social benefits from barter exchange in a monetized economy. We first prove a no-trade theorem regarding the ability of firms with double-coincidences-of-wants to negotiate improvements in trade among themselves relative to the market outcomes. We then demonstrate that in the presence of liquidity shocks, introducing a non-monetary exchange avoids this limitation and enhances trade by (1) generating liquidity and (2) by segmenting the market place into low-demand and high-demand customers in a manner which is impossible with pure monetary exchange. We provide comparative statics illustrating the importance of each effect and relevant extensions.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-10/cesifo_wp586.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 586.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_586
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  1. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
  2. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-91.
  3. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Marin, Dalia & Schnitzer, Monika, 1995. "Tying Trade Flows: A Theory of Countertrade with Evidence," American Economic Review, American Economic Association, vol. 85(5), pages 1047-64, December.
  5. Nobuhiro Kiyotaki & John Moore, 2004. "Credit Chains," ESE Discussion Papers 118, Edinburgh School of Economics, University of Edinburgh.
  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.
  7. Sudipto Bhattacharya and Kathleen Hagerty., 1984. "Dealerships, Trading Externalities, and General Equilibrium," Research Program in Finance Working Papers 143, University of California at Berkeley.
  8. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  9. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 371-83, May.
  10. Ellingsen, Tore, 1998. "Payments in Kind," SSE/EFI Working Paper Series in Economics and Finance 244, Stockholm School of Economics, revised 10 Feb 2000.
  11. Williamson, S. & Wright, R., 1991. "Barter and Monetary Exchange Under Private Information," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9107, University of Western Ontario, The Centre for the Study of International Economic Relations.
  12. Bose, Gautam, 1996. "Bargaining Economies with Patient and Impatient Agents: Equilibria and Intermediation," Games and Economic Behavior, Elsevier, vol. 14(2), pages 149-172, June.
  13. Rubinstein, Ariel & Wolinsky, Asher, 1987. "Middlemen," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 581-93, August.
  14. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  15. Prendergast, Canice & Stole, Lars, 2000. "Barter relationships," MPRA Paper 33400, University Library of Munich, Germany.
  16. Ellingsen, Tore & Stole, Lars A., 1996. "Mandated countertrade as a strategic commitment," Journal of International Economics, Elsevier, vol. 40(1-2), pages 67-84, February.
  17. Aiyagari, S Rao & Wallace, Neil, 1992. "Fiat Money in the Kiyotaki-Wright Model," Economic Theory, Springer, vol. 2(4), pages 447-64, October.
  18. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
  19. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  20. Hennart, Jean-Francois & Anderson, Erin, 1993. "Countertrade and the Minimization of Transaction Costs: An Empirical Examination," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 290-313, October.
  21. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  22. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  23. Hennart, Jean-Francois, 1989. "The Transaction-Cost Rationale for Countertrade," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 127-53, Spring.
  24. Canice Prendergast & Lars A. Stole, 1996. "Non-Monetary Exchange Within Firms and Industry," NBER Working Papers 5765, National Bureau of Economic Research, Inc.
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