The Economic Institution of International Barter

Starting with the international debt crisis in the early 1980s, the volume of international barter trade increased substantially. This paper examines how barter can help highly indebted countries to finance imports if they cannot use standard credit arrangements. We argue that payment in goods is easier to enforce than payment in money. But there is also a risk that the debtor pays with inferior quality products. We rank goods with respect to these incentive properties and derive the economic institution of commodity money which explains the trade pattern in barter. The predictions of our model are consistent with data on actual barter contracts.