DP5398 'Home Biases', 19th Century Style

Author(s): Marc Flandreau
Publication Date: December 2005
Keyword(s): colonies, home bias, Lucas paradox, willingness to pay
JEL(s): F31, N32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5398

This paper discusses the existence of 'home' biases in the 19th century global capital market, whereby colonies appear to have received a 'disproportionate' amount of capital from their metropolis. Starting from a discussion of the Bulow Rogoff (1989) problem, we argue that imperial links provided a natural institutional framework to make pre-commitment credible by ensuring an adequate degree of willingness to pay. This was not because imperial rule provided coercion or punishment, but rather because it supplied a legal framework that effectively suppressed the « sovereign » nature of colonial debts. We conclude that the greater facility with which capital migrated in the 19th century has much to do with the fact that colonies were more akin to the 'regions' of modern countries