Rok Spruk (University of Ljubljana)
Mitja Kovac (University of Ljubljana)
Shai Dothan (University of Copenhagen)
We examine the contribution of radical institutional reforms to long-term development of property rights and contracting institutions. The Mexican-American War (1846-1848) had a deep impact on the institutional development of Mexico. It partially removed the legal and economic barriers that protected the old oligarchic elites and paved the way for the modernization of legal and commercial codes. To this end, we exploit the within-country variation in the presence of US troops during Mexican-American war across Mexican states and cities as a source of variation in transaction costs. Using propensity score and nearest neighbor matching techniques with orthogonal covariates, we present evidence on the long-run institutional implications of the troops presence. Troops-controlled areas have less complex business registration procedures, better quality of land administration, broader access to property rights, markedly better quality of the judicial process and lower costs of enforcing contracts than the areas without troops presence. We show that US troops presence generated a positive and radical historical shock for institutional development that survived to the present day and made the return to status quo nearly impossible. The positive effects of troops presence are robust to a variety of specification checks and are particularly large for smaller cities.