History matters: New evidence on the long run impact of colonial rule on institutions

This paper proposes a new instrument for institutional quality which varies across countries with historically low rates of European settlement. Using a new data set which exploits differences in the quality of colonial administration, it finds evidence that colonies with better paid colonial governors developed better institutions (and became wealthier) than colonies with lesser paid governors. Initially, the best paid governors were sent to colonies which generated the largest revenues but, since the governors’ pay scale remained largely fixed for the next 40years, the same colonies continued to receive the best governors. The data indicate that these early differences in colonial administration—and not initial differences in revenue generating capacity—had a long-run impact on economic development.