Contract enforcement and trade liberalization in Mexico's footwear industry

Abstract The wave of formal legal system reforms sweeping developing countries provides only a partial solution to the problem of enforcing agreements between firms. Informal institutions govern the majority of interfirm transactions. Economic reform also necessitates changes in these institutions. This paper examines the evolution of contract enforcement in the Mexican footwear industry as trade barriers were removed. In the closed economy, geographic agglomeration of manufacturing allowed the manufacturers' trade associations to maintain information about the behavior of retailers and gave retailers strong incentives to maintain reputations. By providing an alternative source for procurement, trade liberalization weakened the power of manufacturers.

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