DP673 Tying, Risk-Sharing, and `Lock-In': An Investigation of Countertrade Contracts

Author(s): Dalia Marin
Publication Date: June 1992
Keyword(s): Contract Theory, Countertrade, Eastern Europe, Trade Policy
JEL(s): F13, F14, O57
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=673

The paper sees countertrade - the tying of trade flows - as an insurance contract that mitigates contractual hazards and reduces the incentive for ex post `hold-up' when parties are `locked' in a relationship after they have made specific investment. This way tying is seen as a commitment device against renegotiation during contract execution when investments are sunk. Moreover, tying is seen as an institutional setting that is effective in securing technology spillovers from developed countries to Eastern Europe (PCPEs) and LDCs. Based on a sample of 230 countertrade contracts signed between firms in OECD countries and PCPEs and LDCs in the period 1984-8, this view of countertrade is found to be consistent with the data.