Institutions and the Long-run Impact of Early Development

We study the role of institutional development as a causal mechanism of history affecting current economic performance. Several indicators capturing different dimensions of early development in 1500 AD are used to remove the endogenous component of the variations in institutions. These indicators are adjusted with large-scale movements of people across international borders using the global migration matrix of Putterman and Weil (2010) to account for the fact that the ancestors of a population have facilitated the diffusion of knowledge when they migrate. The exogenous component of institutions due to historical development is found to be a significant determinant of current output. By demonstrating that the relationship between early development and current economic performance works through the channel of institutions and that better institutions can be traced back to historical factors, the results of this paper shed some light on how history has played a role in shaping long-run comparative development