Discussion Paper Details

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Title: Tying Trade Flows: A Theory of Countertrade

Author(s): Dalia Marin and Monika Schnitzer

Publication Date: May 1994

Keyword(s): Countertrade, Creditworthiness, Double Moral Hazard Problem, Sovereign Debt and Technology Transfer

Programme Area(s): International Trade and Regional Economics

Abstract: A countertrade contract ties an export to an import. Usually, countertrade is seen as a form of bilateralism and reciprocity and thus as an inefficient form of international exchange. In this paper we argue that there are circumstances where the tying of two technologically unrelated trade flows may be efficiency enhancing. We show that countertrade can be seen as an efficient institution that solves moral hazard problems and restores creditworthiness of countries with large outstanding debt. We test the implications of our model using a sample of 230 countertrade contacts.

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Bibliographic Reference

Marin, D and Schnitzer, M. 1994. 'Tying Trade Flows: A Theory of Countertrade'. London, Centre for Economic Policy Research.