Research

Proximity as a Substitute of Contract Enforcement in Specialized Trade

2025

We examine how geographic proximity can substitute for contract-enforcement institutions in enabling international exports of specialized goods. When exporters must meet buyers’ specific product requirements, successful trade depends 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.

Recommended citation: Espinoza, L. and J. Morales-Arilla (2025). "Proximity as a Substitute of Contract Enforcement in Specialized Trade." Working Paper.
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Contracting frictions, geography, and multinational firms: evidence from Mexico

2023

I explore how contracting frictions and geography influence the trade costs faced by multinationals in their affiliates located in Mexico relative to domestic firms. I document two key facts. First, distance to firm’s home countries influences firms’ sourcing patterns. Second, sectors with a larger presence of foreign affiliates are more intensive in relationship-specific inputs. I develop a small open economy model with multiple sectors, imperfect contracting, input relationship-specificity, global sourcing and multinational production. I compute a set of counterfactual equilibria to gauge the relative importance of contracting frictions, trade costs, and productivity in the price advantage of multinationals over domestic firms. My findings show that, contrary to priors, foreign firms seem to have a disadvantage relative to domestic firms in trade costs and contracting frictions. Eliminating differences in contracting frictions between foreign and domestic firms leads to a reduction in real GNP of 2.7 percent, while doing so only for productivity reduces real GNP by 2.2 percent.

Recommended citation: Espinoza, L. (2023). "Contracting frictions, geography, and multinational firms: evidence from Mexico." Working Paper.
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Shifting Gears: A Growth Diagnostic of Panama

2016

This paper explores export diversification opportunities and studies the potential binding constraints that Panama can run into in the process of shifting gears towards a sustainable economic growth. We recommend that Panama must increase its stock of human capital by improving the quality of education and removing restrictions to high-skilled immigraton. In addition, Panama must strengthen its institutions and reduce red tape and corruption, which most firms considered the most binding constraint to growth.

Recommended citation: Hausmann, R., Espinoza, L. and Santos, M. A. (2016). "Shifting Gears: A Growth Diagnostic of Panama." CID Working Paper. No. 325.
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Why is Chiapas Poor?

2016

This paper is an attempt to determine the factors associated with the wage gap between Chiapas and the rest of Mexico. We find that Chiapas is not poor solely because it has a low endowment of factors compared to the rest of Mexico, but because the diversity of its factors of production does not allow it to produce many, more complex, goods that they could sell outside the state.

Recommended citation: Levy, D., Hausmann, R., Santos, M. A., Espinoza, L. and Flores, M. (2016). "Why is Chiapas Poor?" CID Working Paper. No. 300.
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Diagnostico de Crecimiento de Chiapas: La Trampa de la Baja Productividad

2015

This paper follows the Growth Diagnostics methodology developed by Hausmann, Rodrik and Velasco (2005), and adapts it to the subnational context to identify the most binding constraints to economic growth in Chiapas. Our conclusion is that Chiapas suffers from a (low) productivity trap. Its main problem is a low complexity economy, a reflection of its few productive capabilities.

Recommended citation: Hausmann, R., Espinoza, L. and Santos, M. A. (2015). "Diagnóstico de Crecimiento de ChiapasL La Trampa de la Baja Productividad." CID Working Paper. No. 304.
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Un análisis exploratorio de convergencia en el PIB per cápita entre departamentos en el Perú, 1979-2008

2011

This paper studies convergence in real GDP per capita across Peruvian departamentos between 1979 and 2008. We find a negative relationship between the growth in the national real GDP per capita and inequality across departamentos (sigma-convergence). We also document a weak beta-convergence among Peruvian departamentos.

Recommended citation: del Pozo, J. M. and Espinoza, L. M. (2011). "Un análisis exploratorio de convergencia en el PIB per cápita entre departamentos en el Perú, 1979-2008", in León Castillo, J. and Iguíñiz Echevarría, J.I. (eds.) Desigualdad distributiva en el Perú: dimensiones. Lima: Fondo Editorial de la Pontificia Universidad Católica del Perú.
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Imported inputs, contracting frictions and productivity

2025

I explore to what extent the positive effect that imported inputs has on domestic firm’s productivity is accounted by an (indirect) access to foreign contract enforcement institutions. Based on the identifying assumption that customized inputs are affected by contracting frictions but homogeneous inputs are not, I can separately identify this channel from a more broad “quality” effect (foreign inputs are vertically differentiated from domestic ones) by combining a rich microdata from Mexico at the firm-input-source level and a theoretical model of contracting frictions and international trade.