Why countertrade? An economic perspective

Abstract

Countertrade is a peculiar form of transaction allegedly popular in less developed countries and in centrally planned economies. It attracted much interest in the past decade. As the landscape of economic systems drastically changed recently, one wonders what the fate of countertrade will become. In this article we review various motivations for countertrade. We argue that the validity of many popular explanations is suspect. We contend that countertrade exemplifies bundled market transactions, a phenomenon generally observed when transaction difficulties are encountered. The bundling is a contractual arrangement that alleviates the market-for-lemons problem, the principal-agency problems, difficulties in the protection of property rights, and time-inconsistency problems. Bundled transactions will remain as long as the transaction difficulties exist. Terminology may change, but the economic do not.

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