Disorganization and financial collapse

Holger Mller, Gerard Roland and the discussants and participants of the seminars and conferences for helpful comments, the Harvard Institute for International Development for nancial and logistic support, Alexis Giesen and Bogdan Gorochowskij for valuable research assistance. Disorganization and Financial Collapse This version: October 1999 Recently, Blanchard and Kremer (BK) argued that disorganization has led to the out-put decline in the former Soviet Union. In this paper we introduce liquidity and credit constraints into the BK model and show how these problems can alleviate the hold-up problem. We argue further that barter creates a hostage which allows to deal with dis-organization when credit enforcement is prohibitively costly. The theory helps to explain how the three observed phenomena of output decline, inter-rm arrears and barter in transition economies are connected. Based on a survey of 165 barter deals in the Ukraine in 1997, we reproduce the BK result with rm level and deal specic data and we show that in addition to the input shortage the nancial shortage and barter have each an important eect on output growth