Tying trade flows: A theory of countertrade with evidence

A countertrade contract ties an export to an import. Usually, countertrade is criticized as a form of bilateralism and reciprocity and thus as an inefficient form of international exchange. In this paper we argue that there are circumstances in which the tying of two technologically unrelated trade flows may be efficiency-enhancing. We show that countertrade can be an efficient institution in international trade that solves moral-hazard problems and restores creditworthiness of highly indebted countries. We test the implications of our model using a sample of 230 countertrade contracts.