Abstract

We exploit di®erences in early colonial experience to estimate the e®ect of institutions on economic performance. Our argument is that Europeans adopted very di®erent colonization policies in di®erent colonies, with di®erent associated institutions. The choice of colonization strategy was, at least in part, determined by the feasibility of whether Europeans could settle in the colony. In places where Europeans faced high mortality rates, they could not settle and they were more likely to set up worse (extractive) institutions. These early institutions persisted to the present. We document these hypotheses in the data. Exploiting di®erences in mortality rates faced by soldiers, bishops and sailors in the colonies during the 18th and 19th centuries as an instrument for current institutions, we estimate large e®ects of institutions on income per capita. Our estimates imply that a change from the worst (Zaire) to the best (US or New Zealand) institutions in our sample would be associated with a ¯ve fold increase in income per capita.

Citations