DP946 Tying Trade Flows: A Theory of Countertrade

Author(s): Dalia Marin, Monika Schnitzer
Publication Date: May 1994
Keyword(s): Countertrade, Creditworthiness, Double Moral Hazard Problem, Sovereign Debt, Technology Transfer
JEL(s): D23, F13, F34, L14
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=946

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.