ABSTRACT
We examine how geographic proximity substitutes for contract enforcement institutions in enabling trade in specialized goods. When products require customization, successful trade depends on either strong contract enforcement or close buyer-seller relationships enabling monitoring and trust. Proximity facilitates such relationships by reducing business travel costs. Our theoretical framework predicts institutional quality primarily affects specialized trade at longer distances, where 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, business travel and passenger flights decline more sharply with distance toward destinations with weak contract enforcement institutions.
Espinoza Bardales, Luis and Morales-Arilla, Jose, Proximity as a Substitute of Contract Enforcement in Specialized Trade (March 14, 2026).
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