ECONOMIC INCENTIVES AND INTERNATIONAL-TRADE

This paper studies the importance of incentives as a determinant of in ternational trade flows. We argue that barter, countertrade and foreig n direct investment can be seen as efficient institutions that mitigat e contractual hazards which arise in technology trade, marketing and i mperfect capital markets. Paying an import with export goods rather th an cash (barter) helps to overcome incentive problems that arise in de bt repayment of highly indebted countries. Payment in export goods rem oves the anonymity of the medium of exchange and thus allows to create a collateral for the creditor. Furthermore, tying an import with an e xport (countertrade) helps to solve the incentive problems related to the technology transfer to developing countries. The export flow serve s as a 'hostage' that deters cheating on the quality of the imported t echnology good. The predictions of the two models are consistent with the pattern of trade of actual barter and countertrade contracts. (C) 1998 Elsevier Science B.V. All rights reserved.