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_*<math>I_{j,1415}</math> is the country j's initial institutions calculated as the average of constraint on the executive in 1400 and 1500. *The <math>\gamma_{t} \cdot I_{j,1415} \cdot d_{t}</math> term allows for any differential economic trends related to differences in initial institutions that would apply even without access to Atlantic trading. *<math>ln AT_{t} \cdot PAT_{j}</math> term measures the effect of Atlantic trade for a given level of institutions. *<math>ln AT_{t} \cdot PAT_{j} \cdot I_{j,1415}</math> tests the hypothesis of interest A significant <math>/eta</math> implies that there were differential paths taken by countries with different initial institutions, but divergent relates significantly to whether they took advantage to Atlantic trade. *Results of Specification (3)::<math>ln AT_{t} \cdot PAT_{j}</math> is significant by itself and with <math>\gamma_{t} \cdot I_{j,1415} \cdot d_{t}</math>. However, when <math>ln AT_{t} \cdot PAT_{j} \cdot I_{j,1415}</math> is entered, it is the only significant term.
Acemoglu, Johnson, Robinson (2005) (view source)
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Return to [[BPP Field Exam Papers 2012]]
==Empirical Questions: ==
Specification 2 repeats specification 1 using a more restricted model, as we force differential growth to be related to log of aggregate volume of atlantic trade in time t and country j instead of simply being an Atlantic trader. Results are nearly identical to Specification 1.
====The Role of Initial Institutions====
:<math>u_{jt} = d_{t} + \delta_{j} + \sum\limits_{t>=1600} \alpha_{t} \cdot WE_{j} \cdot d_{t} + \beta \cdot ln AT_{t} \cdot PAT_{j} + \sum\limits_{t>=1500} \gamma_{t} \cdot I_{j,1415} \cdot d_{t} + \eta \cdot ln AT_{t} \cdot PAT_{j} \cdot I_{j,1415} + \epsilon_{jt}</math>
=== What do the authors tests achieve?===
The author's test seem to indicate that countries with Atlantic trading did account for most of the differential growth experienced by western Europe. They also so that While Atlantic trading by itself does seem to explain the differential growth, its actually the interaction between Atlantic trading and Initial Institutions that seem to explain the differential growth.
===How could the tests be improved on? Strengths? Weaknesses?===
While the authors have done a very good job of addressing many alternative hypothesis, there is still room to worry. Even though we include country effects, there are probably still substantial variation in the rule of law across countries. One might think that financial institutions and more secure property rights would exist closer to the capital, which is usually a port city.
We may also be concerned of differential effects between western European port cites and other port cities. While I have no evidence to back this up, I may think that western Europe's cold climate is better for resisting disease, than the warm Mediterranean climate, and port cities had cleaner air due to the ocean breezes, so perhaps the differential effect could be due to less wealth loss due to sickness.
===What are some alternative empirical strategies===
=== How does the author rule out alternative hypotheses? ===
*Could this just be a cultural effect? No, Western Europe non-Atlantic traders did not grow faster.
*Could this be a cost effect? No Mediterranean traders did not grow faster.
*Could this just be due to income generated from trade? No, prior work by historians indicate that income earned from trade can not explain growth differences.
To check the robustness of their results, the authors run specification (2) with a number of additional covariates.
