Barter relationships

Canice Prendergast and Lars Stole

MPRA Paper from University Library of Munich, Germany

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: Barter; non-monetary exchange (search for similar items in EconPapers)
JEL-codes: C78 F10 (search for similar items in EconPapers)
Date: 2000-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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