The long-term welfare effects of colonial institutions: Evidence from Central India

In Central India, the Narmada River separates two regions that have been ruled by different types of government only during the colonial period, and for reasons independent of their initial economic development. I implement a spatial RDD on village population in the Nineteenth Century as well as in 1901, and I run the same model on proxies of welfare in 2015. My results highlight that divergence has realised where the river overlapped with the colonial border, but not in a neighbouring area where the same Narmada River separates two shores with the same type of former colonial institution. I discuss the following transmission mechanism. The treated group was directly administered by the British with more modern state tools - such as the enforcement of property rights and a transparent taxation system - that made it easier to develop private investment. The most prominent example is the mixed-capital enterprise in charge of the construction of the first trans-continental railway. Infrastructure endowment seems to be crucial for the long-term transmission of the colonial institutional characteristics to the outcomes measured in 2015, which show better average welfare outcomes, as well as higher wealth inequality in the treated group. My work provides an explanation of how the improvement in the quality of the institutions of an embryonic state may sustain the growth of the local markets it deems relevant.