Did the colonial powers pick the economic winners?

This paper proposes a new instrument for institutional quality—the salary of colonial governors—to investigate whether variations in the quality of British colonial rule continue to have an impact on the economic performance of former colonies. Governors' salaries provide a good source of exogenous variation because the ranking of salaries across the British Empire remained relatively fixed from the late nineteenth century onwards. Perhaps most important, this instrument varies widely across colonies with historically low rates of European settlement—that is, most countries in today's developing world. Using a two-stage least squares estimation procedure, I find that colonies with higher paid governors developed better institutions (and higher per capita income) than colonies with lower paid governors.