Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Abstract: Payments in kind pose an enduring and empirically important puzzle. The paper provides a formalization of the popular view that payment in kind are due to financial constraints. The key assumption is that buyers' liquidity is private information. Buyers who are financially constrained may prove their hardship by making part of the payment in kind. The paper models explicitly the credit market imperfections which lead to payments in kind and yields predictions which are consistent with a number of empirical observations. In particular, it offers a coherent explanation for the recent explosion of barter in Russia and other former Soviet republics.
28 pages, First version: June 9, 1998. Revised: February 10, 2000.
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