Product Quality, Market Signaling, and the Development of East-West Trade

Peter Murrell, Economic Inquiry 20(4), 589-603, October .


Countertrade, a contractual form in which there is a two-way flow of goods, occupies a position of significance in East-West trade. In this paper, it is shown that countertrade can solve problems which arise when the quality of Eastern European products is unknown. Using the market signaling literature, a theory is formulated in order to make predictions concerning the use of countertrade. Countertrade will be particularly useful when quality information is important but cannot be obtained directly and when a country has a poor quality reputation. These predictions are supported by empirical tests.

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