Firms in developing countries often face concentrated input markets and contracting frictions. This paper studies the efficiency of self-sustained long-term relationships between buyers and sellers, a common solution to contracting frictions, when sellers have significant market power and trade-credit contracts cannot be enforced through courts. Using new transaction-level data from the Ecuadorian manufacturing supply chain, I document trade patterns consistent with these frictions. As a relationship ages, quantities rise, and prices fall more than can be explained by quantity discounts. Based on these facts, I develop and estimate a dynamic non-linear contracting model with limited enforcement in which buyers can default on their trade-credit debt without legal penalties. In the estimated model, sellers withhold trade in early periods of a relationship, and encourage trade in later periods, in order to give buyers an incentive to pay debts. My key finding is that bilateral trade is estimated to be inefficiently low in early periods of the relationship, but converges toward efficiency as relationships age, despite sellers' market power. Counterfactual simulations imply that both seller market power and limited enforcement contribute to inefficiencies in trade, as addressing either friction alone leads to welfare losses, and that relaxing both frictions can lead to significant efficiency gains.
We use new administrative data from Ecuador to study the welfare effects of the misallocation of procurement contracts caused by political connections. We show that firms that form links with the bureaucracy experience an increased probability of being awarded a government contract. The reallocation of contracts generates opportunities for misallocation, as politically connected firms charge higher prices and are less efficient than unconnected firms. We develop a methodology to quantify the welfare losses of political connections through these margins—price inflation and quality-adjusted excess cost of provision—and estimate welfare losses of up to 8% of the procurement budget.
Media Coverage: El Telégrafo
This paper studies the diffusion of liquidity shocks through ownership networks. Using novel administrative data from Ecuador for 2007-2016, I find that investment, employment, and cash flows increase as a response to liquidity shocks to related firms when the firm is financially constrained. Evidence suggests that i) these spillovers work mainly through the collateral channel, rather than the internal capital market or the internal trade channels, and that ii) flows may be inefficient as resources are not targeted towards firms with the highest return to capital or labor nor the most productive.
LIQUIDITY SPILLOVERS IN OWNERSHIP NETWORKS - 2018
(email me for a draft)
TAKE THE GOODS AND RUN: CONTRACTING FRICTIONS AND MARKET POWER IN SUPPLY CHAINS - 2020 (Job Market Paper 1)