11/20/2009

Institutions
These are the "rules" of the society in which you live.
Economists view laws as a series of incentives
  - don't fight dogs: the punishment is 25 cents vss 2 years in jail

Our focus: what is the role of institutions on economic outcomes?

Does geography matter for development?
  - look at a map: all of the poor areas of the world are in the tropics,
    between tropic of cancer and tropic of capricorn
  - can survive easier in tropics areas.  but maybe that meant they had to
    innovate less
  - indigenous population density

What about colonialism?
  - the way colonialism happened in tropics was different than how it happened
    in africa/australia
  - interesting who showed up where?  studied by schleifer/la porta
  - level of agency of the folks who are running the day-to-day affairs:
    colonies in the U.S. controlled more than the folks in sub-saharan africa did.
  - different approach to taking over indigenous population
  - commonality of lanugages
  - why did the colonizers come over? settling or exploiting resources?
  - remittances---how much did occupiers give back to indigenous people years
    later (usa vs. brazil).

So to compare geography to colonialism, try to model:
  Y = a + bX + cZ + error
  
  compare output today , Y, with coefficients of regression b and c, of the
  institutional factors (X) and the geographic factors (Z).

But there are issues here.  X is endogenous---if there are other unmeasured variables
  that affect y by way of X, you might give institutional factors more credit than
  they are worth.  Maybe even geography and institution are correlated, so
  institution gets credit for some of the geography stuff.

To solve this, use instrument variables
  find M->X->Y that doesn't affect Y by any way other than X
 -> policy of colonial power that they implemented on the ground (britain always
    ran common law, etc.)
 -> mortality of settlers.  the only way mortality then affects output now
    is by way of institutional decisions.  so geogrpahy might have acted
    to kill people, but that affected _how_ they ran the country.

Findings: while geography might have influenced institutions, it was the institutions
  that were set up that affects output today.  so geography matters, but only
  in a deep sense: what really matters is how the colonizers treated the colonized
  to affect their output today.