The Profitabality of Colonialism

17 Pages Posted: 25 Aug 2000 Last revised: 14 Aug 2010

See all articles by Murat Iyigun

Murat Iyigun

University of Colorado at Boulder - Department of Economics; Harvard University - Center for International Development (CID); IZA Institute of Labor Economics

Herschel I. Grossman


Date Written: August 1993


This paper develops an analytical framework for studying colonial investment from the perspective of neoclassical political economy. The distinguishing feature of colonial investment in this model is that the metropolitan government restricts the amount of investment in the colony in order to maximize the net profits earned in the colony. The model explicitly includes the threat of extralegal appropriative activities by the indigenous population in the colony. The analysis of this model identifies the conditions, where these conditions include both the technology of production and the technology of extralegal appropriation, that determine the profitability of colonialism. The analysis suggests why historically some countries but not others became colonies and why many colonies that were initially profitable subsequently become unprofitable and were abandoned. The model also has implications for the amount of investment. the allocation of resources between productive and appropriative activities, and the distribution of income in colonies.

Suggested Citation

Iyigun, Murat F. and Grossman (deceased), Herschel I., The Profitabality of Colonialism (August 1993). NBER Working Paper No. w4420, Available at SSRN:

Murat F. Iyigun

University of Colorado at Boulder - Department of Economics ( email )

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Harvard University - Center for International Development (CID) ( email )

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IZA Institute of Labor Economics

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