Proximity as a Substitute of Contract Enforcement in Specialized Trade

Luis Espinoza () and Jose Morales-Arilla ()
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Luis Espinoza: Texas A&M University
Jose Morales-Arilla: School of Government and Public Transformation, Tecnológico de Monterrey

No 10, Working Paper Series of the School of Government and Public Transformation from School of Government and Public Transformation, Tecnológico de Monterrey

Abstract: We examine how geographic proximity can substitute for contract-enforcement institutions in enabling international exports of specialized goods. When ex-porters must meet buyers’ specific product requirements, successful trade de-pends on either strong contract enforcement or close buyer-seller relationships that enable monitoring and trust. We argue that geographic proximity facilitates such relationships by reducing the costs of frequent business travel. Our theoretical framework predicts that institutional quality should primarily affect specialized trade over longer distances, as proximity-based relationship-building becomes prohibitively expensive. Using bilateral, product-specific export data in a gravity model, we find strong empirical support for this prediction. Consistent with our theory, we also show that business travel expenses and passenger flights decline more sharply with distance when destination countries have weak contract enforcement institutions.

Keywords: International trade; Contract enforcement; Relationship-specific trade; specialized goods; Gravity model; Business travel. (search for similar items in EconPapers)
JEL-codes: D72 D83 L82 O54 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2025-09
New Economics Papers: this item is included in nep-iaf
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