 By Daron Acemonglu, Simon Johnson, and

James A. Robinson, 2001.

 Question: What causes Large Income per
Capita differences across countries?
o Institutions, property rights, and distortionary
policies cause differences in capital
investment.
o Cross-country correlations between property
rights and economic development support
part of this hypothesis.
 European colonies with high mortality rates
are more likely to set up extractive
institutions.
 Institutions make a difference
o North and South Korea
o East and West Germany
 Goal: To estimate the effect of institutions on
economic performance based on differences
in European mortality rates.
 No prior research on settler mortality and
institutions link.
 However, research on colonial experience and
institutions
 Authors here focus on conditions of the
colonies rather than identity of the colonizer
o Engerman and Sokoloff(1997)
 Factor endowments
 Might greater economic performance
influence the rise of certain institutions?
 Omitted or Lurking variables?
 Exclusion restriction: Might Mortality Rates of
European settlers affect current GDP per
capita levels directly or through other
channels?
o Potential correlation with current disease
climate.
1. Different colonization policies created
different sets of institutions.
 Extractive states
 “Neo-Europes”(Alfred Crosby, 1986).
2. Feasibility of settlement influenced policy.
3. The colonial state and institutions persisted
even after independence.
(Potential) Settler Settlements
Mortality

Early Current
institutions Institutions

AGR assumes that institutions

Current persisted even after
performance independence
 AJR (2001) attempts to measure the effect of
institutions on growth by introducing an
exogenous source of variation in institutions
to measure the different outcomes.
 The main exogenous source of variation was
settler mortality.
 Regress current performance on current
institutions.
 Instrument institutions by settler mortality
rates.
 PRS protection against “risk of exploration”
2
index as proxy for institutions.
 R =25% for institutions and mortality rates.
 Over identification tests.
 Mortality and Settlements
o The paper cites previous studies’ empirical
historical evidence on early European
expeditions which were terminated due to
high mortality rates
 Even when “settler colonies” weren’t initially
formed, settlers in Australia and New Zealand
fought to form them, while mercantilist
systems were formed in Latin America, Asia,
and Africa.
 Sunk costs of establishing institutions may
prevent elites from switching to extractive
institutions, and vise versa.
 Inverse relationship between size of elite and
size of revenue shares from an extractive
strategy.
◦ King Leopold ruled Congo as his own property until he
was forced to sell it to the Belgian parliament in 1908
 Irreversible investments leads to persistence.
Always
significant
positive
relationship
Protection against
  Strengths:  Weaknesses:
o Strong, statistically  Predictive failure.
significant, positive o Nigeria and Chile.
institution-  Latitude Significance.
performance  Other continent
relationship dummies.
 Reverse Causality?
 Omitted Y
Determinants.
 Institution index bias.

Thus the need for an investment for institutions,

namely mortality.
 Malaria
 Yellow Fever
Mortality and institutions
 Mortality
And
GDP/Capita
 A substantial but not implausibly large effect
of institutional differences on income per
capita.
 Latitude has long sign and no longer
significant; correlated with institutions.
 Resistant to exclusion of the Neo-Europes
and addition to insignificant continent
dummies.
 The IV estimate of 0.94 (of the effect of
institutions) is greater than the OLS estimate
od 0.52.
◦ Measurement error in institutions variable is more
significant than reverse causality or omitted
variable bias.
 Shows large effect of institutions on economic
performance.
 Instrument explains 25% of variations in today’s income
 Only valid if settler mortality has no direct
effect on current economic performance.
 Controls for legal origin and religion verify
original results.
 Temperature, humidity, soil quality all
insignificant as well.
 Malaria, expected to be endogenous, is
insignificant.
 Test whether settler mortality, settlements, or
early institutions have any direct effect on
income per capita
 Data support the aforementioned over
identifying restrictions: no additional effects
 These variables are already captured in the
morality-current institution regression and
thus are not significant as exogenous
regressors.
 Differences in colonial experience might be a
source of exogenous differences in institutions.
 Early institutions persisted to the present.
 The morality-settlement-institutions link.
 Income-institution relationship is not driven by
outliers and is robust for all conceived controls.
 However, the results do not imply that current
institutions are not predetermined by colonial
policies and cannot be changed
o Economic gains from improving institutions
(Japan, South Korea).

https://slideplayer.com/slide/5015540/