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The Profitabality of Colonialism

  • Herschel I. Grossman
  • Murat Iyigun

This paper develops an analytical framework for studying colonial investment from the perspective of neoclassical political economy. The distinguishing feature of colonial investment in this model is that 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 extralegal appropriative activities by the indigenous population in the colony. The analysis of this model identifies the conditions, where these conditions include both the technology of production and the technology of extralegal appropriation, that determine the profitability of colonialism. 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. the allocation of resources between productive and appropriative activities, and the distribution of income in colonies.

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File URL: http://www.nber.org/papers/w4420.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4420.

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Date of creation: Aug 1993
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Publication status: published as "The Profitability of Colonial Investment" Economics & Politics, vol. 7, November 1995, pp. 229-241.
Handle: RePEc:nbr:nberwo:4420
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Grossman, Herschel I, 1994. "Production, Appropriation, and Land Reform," American Economic Review, American Economic Association, vol. 84(3), pages 705-12, June.
  2. Grossman, Herschel I, 1991. "A General Equilibrium Model of Insurrections," American Economic Review, American Economic Association, vol. 81(4), pages 912-21, September.
  3. 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.
  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.
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