Abstract
We show that institutions can explain geographic concentration over and above agglomerative forces. This paper uses within country variation in institutional quality, combined with a local identification approach and instrumental variable strategy to explain spatial differences in investment. We use direct (indirect) British rule as proxies for areas with low (high) institutional quality. Institutions can explain 13% of total geographic variation in investment. Moreover, investment is 8-10% lower in areas with low institutional quality. Differences in institutional quality manifest as greater court delays, impeding contractual claims, property rights, and dispute resolution, thereby decreasing investment and increasing project abandonment.
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