Alternative instruments for institutional quality and the effect of european settlements on economic development

The study of the effect of institutional quality on economic performance has a long tradition in economic development. Considering the problems of reverse causality in the link between economic development and institutions, most recent research employs instrumental variables for the measurement of this effect. The present paper explores the impact of European settlements on economic development. These settlements are explained as a function of climate, disease environment, and availability of land. Here these variables are found to determine to a great extent European settlements in Africa and the Americas. Consequently, these variables are used as instruments for institutional quality and the large effect of institutions on income per capita documented by previous studies is through them confirmed. This study finds evidence that limitations of other instruments are overcome using these variables as instruments.