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Unbundling Institutions

66 Pages Posted: 28 Dec 2004  

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Simon Johnson

Massachusetts Institute of Technology (MIT) - Entrepreneurship Center; National Bureau of Economic Research (NBER)

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Date Written: July 2003

Abstract

This paper evaluates the importance of "property rights institutions," which protect citizens against expropriation by the government and powerful elites, and "contracting institutions," which enable private contracts between citizens. We exploit exogenous variation in both types of institutions driven by colonial history, and document strong first-stage relationships between property rights institutions and the determinants of European colonization strategy (settler mortality and population density before colonization), and between contracting institutions and the identity of the colonizing power. Using this instrumental variables approach, we find that property rights institutions have a first-order effect on long-run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. A possible explanation for this pattern is that individuals often find ways of altering the terms of their formal and informal contracts to avoid the adverse effects of contracting institutions, but are unable to do so against the risk of expropriation.

Keywords: Contracts, Economic Growth, Financial Development, Institutions, Law and Finance, Legal Formalism, Legal Origin, Political Economy, Politics, Property Rights

JEL Classification: E44, G18, K00, N20, P16, P17

Suggested Citation

Acemoglu, Daron and Johnson, Simon, Unbundling Institutions (July 2003). MIT Department of Economics Working Paper No. 03-29; AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=442900 or http://dx.doi.org/10.2139/ssrn.442900

Daron Acemoglu (Contact Author)

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Simon Johnson

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