Working Paper: CEPR ID: DP2686
Authors: Sergei M. Guriev; Igor Makarov; Mathilde Maurel
Abstract: In this Paper we study, both theoretically and empirically, the relationship between barter and the indebtedness of Russian firms. We build a model in which a firm uses barter to protect its working capital against outside creditors even when barter involves high transaction costs. The main innovation of our work is to allow renegotiation between the firm and its creditors. If the creditors are rational, they often agree to postpone debt payments in order to avoid destroying the firm’s working capital. It turns out, however, that even if the firm cannot ensure it will not divert cash ex post, the outcome of renegotiation still provides ex ante incentives to use barter. We show that the greater the debt overhang, the more likely the use of barter, and although the possibility of debt restructuring reduces barter, it does not eliminate it altogether. We also discuss the role of the government bond market and weak bankruptcy legislation. The firm-level evidence from two independent surveys is consistent with the model’s predictions.
Keywords: barter; debt overhang; demonetarization; renegotiation
JEL Codes: P30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater debt overhang (F65) | increased likelihood of barter use (E42) |
| debt restructuring (F34) | reduced incentive to barter (F16) |
| threat of cash diversion (G35) | less likely to agree to debt restructuring (F34) |
| less likely to agree to debt restructuring (F34) | perpetuates use of barter (E42) |
| high transaction costs associated with barter (F16) | does not deter its use (Y50) |
| indebtedness (F34) | barter use (F19) |