DP2570 Trust Vs Illusion: What is Driving Demonetization in Russia?

Author(s): Dalia Marin
Publication Date: September 2000
Keyword(s): Imperfect Input And Capital Markets, The Virtual Economy, Trade Credit, Trust
JEL(s): D20, G30, O10, P30
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2570

The virtual economy argument for Russia suggests that barter -a payment in goods rather than cash - allows the parties to pretend that the manufacturing sector is producing value added by enabling this sector to sell its output at a higher price than its market value. We confront this prediction with the actual pricing behaviour of industrial sectors in the Ukraine in 1997. Based on pricing data of 165 barter deals we find no systematic difference in the pricing behaviour in non-cash transactions across sectors. What appears to matter for the pricing behaviour is whether the firm is on the selling or buying end of the barter transaction. We offer a model that sees this pricing behaviour as a mechanism to deal with the absence of trust and liquidity in the economy.