Fernando Zanella, Christopher Westley
Institutions are widely recognized as determinants of economic development. However, institutional economists often overlook pertinent historical incidents in their search for broad patterns. At times, this search oversimplifies truly complex phenomena. In light of this, we apply a micro-institutional analysis to explain the success of colonial Brazil's early settlements as a mix of accident and design. By doing so, we stress the limitations that can result when applying an aggregate institutional interpretation of economic history and development. We also apply the principal-agent model and its main feature – risk-sharing – to an extreme case that involves settlers and natives risking their lives, while Portuguese principals sought to reduce transaction costs in an important and resource-rich colony.
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