Recently, Blanchard and Kremer (BK) argued that disorganization has led to
the output 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 disorganization when credit
enforcement is prohibitively costly. The theory helps to explain how the
three observed phenomena of output decline, inter-firm 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 firm level
and deal-specific data and we show that in addition to the input shortage
the financial shortage and barter have each an important effect on output
growth.