4. Empirical Methodology and Baseline Regression Results

This chapter describes the estimation methodology and the data. The model of colonial empires contains testable predictions. Among former colonies of European powers that adopted an ‘economically-oriented’ style of imperialism a negative relationship between initial endowments and current institutions is expected, whereas for colonial empires adopting a ‘politically-oriented’ style no such relationship is expected. These hypotheses are tested via an interaction model in which the effect of endowments on current institutions for each colonial empire can be differentiated. As far as the data are concerned, among all possible indicators of institutional quality, we choose rule of law. Regarding the measure of endowments, we choose population density in 1500, which represents the precolonial level of development and a crucial factor of production in colonial times. The estimation of a basic additive model provides evidence that institutions depend significantly on colonizer identity and endowments, which is consistent with the endowment and colonial origin views. However, since heterogeneity in the relationship between endowments and current institutions across colonial empires is expected, we estimate a baseline interaction model. The evidence indicates that not all colonial powers reacted in the same way to the level of precolonial endowments. Britain followed an ‘economically-oriented’ style of imperialism and, as such, we observe that the evidence fits well the endowment view, since there is a negative and highly significant relationship between initial endowments and current institutions among British colonies. France, by contrast, adopted a ‘politically-oriented’ style of imperialism and, as such, we find that the endowment view does not hold, as reflected in the insignificant coefficient on the interaction term. Regarding the Spanish colonial empire, which is a hybrid between both styles, our model predicts partial applicability of the endowment view, which is congruent with a reported negative coefficient on the interaction term that is smaller (in absolute terms) than that on British colonies and only marginally significant. Portuguese former colonies also show a pattern consistent with the categorization of the empire as ‘economically-oriented’, since endowments exert a negative effect on institutions.