Home Biases, Nineteenth Century Style

This paper discusses the existence of biases in the 19th-century global capital market. Colonies appear to have received a disproportionate amountof capital from their metropolises. Starting from a discussion of the Bulow-Rogoff (1989) problem, we argue on the basis of a simple model thatimperial links provided an institutional framework for ensuring an adequate degree of willingness to pay. This was not because imperial rule providedcoercion or punishment, but rather because it supplied a legal framework that effectively suppressed the sovereign nature of colonial debts and madethem akin to regional debts. We conclude that the greater facility with which capital migrated internationally in the 19th century owed largely tothe fact that colonies being like the regions of modern countries, so that what looks like late 19th-century international financial integrationis more accurately described as "home biases." (JEL: F31, N32) (c) 2006 by the European Economic Association.