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The Profitability Of Colonial Investment


  • Herschel I. Grossman
  • Murat F. Iyigun


This paper develops a model for studying colonial investment in which 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 subversive activity by the indigenous colonial population. 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 in colonies, the allocation of indigenous colonial labor between production and subversive activity, and the distribution of income between colonial firms and the indigenous population. Copyright 1995 Blackwell Publishers Ltd..

Suggested Citation

  • Herschel I. Grossman & Murat F. Iyigun, 1995. "The Profitability Of Colonial Investment," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 229-241, November.
  • Handle: RePEc:bla:ecopol:v:7:y:1995:i:3:p:229-241

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    References listed on IDEAS

    1. Svedberg, Peter, 1982. "The profitability of U.K. foreign direct investment under colonialism," Journal of Development Economics, Elsevier, vol. 11(3), pages 273-286, December.
    2. Grossman, Herschel I, 1994. "Production, Appropriation, and Land Reform," American Economic Review, American Economic Association, vol. 84(3), pages 705-712, June.
    3. Herschel I. Grossman & Murat Iyigun, 1993. "Population Increase, Extralegal Appropriation, and the End of Colonialism," NBER Working Papers 4488, National Bureau of Economic Research, Inc.
    4. Svedberg, Peter, 1981. "Colonial Enforcement of Foreign Direct Investment," The Manchester School of Economic & Social Studies, University of Manchester, vol. 49(1), pages 21-38, March.
    5. Grossman, Herschel I, 1991. "A General Equilibrium Model of Insurrections," American Economic Review, American Economic Association, vol. 81(4), pages 912-921, September.
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    Cited by:

    1. repec:kap:iecepo:v:14:y:2017:i:4:d:10.1007_s10368-016-0358-y is not listed on IDEAS
    2. Nunn, Nathan, 2007. "Historical legacies: A model linking Africa's past to its current underdevelopment," Journal of Development Economics, Elsevier, vol. 83(1), pages 157-175, May.
    3. Graziella Bertocchi, 2011. "Growth, Colonization, and Institutional Development. In and Out of Africa," Center for Economic Research (RECent) 064, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    4. B.P. Zaaruka & J.W. Fedderke, 2011. "Indicators of Political and Economic Institutions in Tanzania: 1884 - 2008," Working Papers 231, Economic Research Southern Africa.
    5. Roberto Bonfatti, 2012. "The Sustainability of Empire in Global Perspective: The Role of International Trade Patterns," CESifo Working Paper Series 3857, CESifo Group Munich.
    6. Bertocchi, Graziella & Canova, Fabio, 2002. "Did colonization matter for growth?: An empirical exploration into the historical causes of Africa's underdevelopment," European Economic Review, Elsevier, vol. 46(10), pages 1851-1871, December.
    7. Greif, Avner & Iyigun, Murat & Sasson, Diego, 2011. "Risk, Institutions and Growth: Why England and Not China?," IZA Discussion Papers 5598, Institute for the Study of Labor (IZA).

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