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Barter, Liquidity and Market Segmentation

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  • Canice Prendergast
  • Lars Stole

Abstract

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.

Suggested Citation

  • Canice Prendergast & Lars Stole, 2001. "Barter, Liquidity and Market Segmentation," CESifo Working Paper Series 586, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_586
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    File URL: http://www.cesifo-group.de/DocDL/cesifo_wp586.pdf
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    References listed on IDEAS

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    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Prendergast, Canice & Stole, Lars, 2000. "Barter relationships," MPRA Paper 33400, University Library of Munich, Germany.
    3. Ellingsen, Tore, 1998. "Payments in Kind," SSE/EFI Working Paper Series in Economics and Finance 244, Stockholm School of Economics, revised 10 Feb 2000.
    4. 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.
    5. Williamson, Steve & Wright, Randall, 1994. "Barter and Monetary Exchange under Private Information," American Economic Review, American Economic Association, vol. 84(1), pages 104-123, March.
    6. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    7. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-1819, November.
    8. Hennart, Jean-Francois, 1989. "The Transaction-Cost Rationale for Countertrade," Journal of Law, Economics, and Organization, Oxford University Press, vol. 5(1), pages 127-153, Spring.
    9. Sudipto Bhattacharya and Kathleen Hagerty., 1984. "Dealerships, Trading Externalities, and General Equilibrium," Research Program in Finance Working Papers 143, University of California at Berkeley.
    10. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-1347, November.
    11. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
    12. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    13. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 371-383.
    14. 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.
    15. 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.
    16. Prendergast, Canice & Stole, Lars, 1999. "Restricting the means of exchange within organizations," European Economic Review, Elsevier, vol. 43(4-6), pages 1007-1019, April.
    17. 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.
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    Citations

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    Cited by:

    1. Prendergast, Canice & Stole, Lars, 2000. "Barter relationships," MPRA Paper 33400, University Library of Munich, Germany.
    2. Ellingsen, Tore, 1998. "Payments in Kind," SSE/EFI Working Paper Series in Economics and Finance 244, Stockholm School of Economics, revised 10 Feb 2000.
    3. Jose Noguera & Susan Linz, 2003. "A Theoretical Model of Barter in Russia," CERGE-EI Working Papers wp207, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    4. Marin, Dalia & Schnitzer, Monika, 2005. "Disorganization and financial collapse," European Economic Review, Elsevier, vol. 49(2), pages 387-408, February.

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    Keywords

    barter; exchange;

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