Initial Conditions, Institutional Dynamics and Economic Performance: Evidence from the American States First Draft: October 2003. Current Draft: February 2004

Using state-level data from the United States, we find that differences in colonial legal institutions have affected the current quality of state legal institutions. These differences in colonial legal institutions arose because some states were settled by Great Britain, a common law country, and other states were settled by France, Spain, and Mexico, all civil law countries. To explain these findings, we develop a transplant-civil law hypothesis that highlights the disruption associated with large-scale legal transplantation and the possible relative inefficiencies of colonial civil law. We find strong support for the transplant-civil law hypothesis. Our results are robust to the inclusion of additional variables capturing climate, geography, initial population, resource endowments, state level rules, and legal environment. Given the 150-200 year gap between the initial conditions and the measures of the current quality of legal institutions, we provide indirect evidence on the persistence of legal institutions. We then use initial legal systems as a source of exogenous variation in current institutions for providing a series of estimates of their impact on current economic performance. *We have benefited greatly from discussions with Daron Acemoglu, Mehmet Caner, Vivian Curran, Stanley Engerman, Helen Hershkoff, Bernie Hibbitts, Lawrence Katz, Bob Margo, Kris Mitchener, Katharina Pistor, Yingyi Qian, James Robinson, Gerard Roland, Peter Shane, G. Alan Tarr, John Wallis, Chris Woodruff, Gavin Wright and the participants at the NBER 2003 Summer Institute on the Development of the American Economy, the CEPR/WDI 2003 Annual International Conference on Transition Economics and the ESF-SCSS Exploratory Workshop on Understanding Large-Scale Institutional Change held in Stockholm, December 2003. We thank Lauree Graham for superb research assistance.