Working Paper: NBER ID: w4420
Authors: Herschel I. Grossman; Murat Iyigun
Abstract: 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.
Keywords: Colonialism; Investment; Political Economy; Extralegal Appropriation
JEL Codes: N00; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Restrictions on investment imposed by metropolitan governments (R38) | Profitability of colonial enterprises (P12) |
| Threat of extralegal appropriation (H13) | Net profits of colonial firms (F54) |
| Profitability of colonialism (F54) | Interplay between technology of production and technology of extralegal appropriation (O33) |
| Threat of extralegal appropriation (H13) | Investment decisions (G11) |
| Investment restrictions (F21) | Operational capacity of colonial firms (L25) |
| Threat of extralegal appropriation (H13) | Potential abandonment of the colony (F54) |