Custom, Formality and Comparative Development: Evidence from Admiralty Rule in Newfoundland

Abstract: Institutions have become a paramount focus in the economics of growth. Institutions, however, can be formal - statutes, courts, and enforcement organizations - or informal - complex systems of cultural norms which constrain the behaviours of defectors. In this paper, I investigate the extent to which these two types of institutions interacted in determining comparative patterns of development within, and the general underdevelopment of the now Canadian province of Newfoundland and Labrador. I leverage a natural experiment resulting from Newfoundland's confederation with Canada, exploiting geographic variation in the location of settlements identify the interaction of informal institutions that arose in early settlements with the formal institutions that were established later. Settlements established during Admiralty Rule in Newfoundland were characterized by limited formal governance and a heavy reliance on custom to protect property rights and solve other collective action problems. My results comprise an interesting case of "reversal of fortune": once prosperous early settlements experienced stagnant growth after confederation relative to settlements that emerged under formal institutions. This implies that customs in these early settlements, when interacting with Canadian institutions, undermined the efficacy of both types of institutional arrangements.