Institutional specialization

Abstract

This paper presents a theory of institutional specialization in which some countries uphold the rule of law while others choose extractive institutions, even though they are ex-ante identical.This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law are more costly; and (ii) the rule of law is more attractive when other countries have extractive institutions. The world equilibrium features a symbiotic relationship between countries with opposite institutions. Using the transition from sail to steam-powered vessels in the nineteenth century, we find empirical evidence consistent with the model.