This paper examines the impact of radical institutional reforms on long-term development of property rights and on institutions regulating contracting. The paper demonstrates that the Mexican-American War (1846-1848) had a significant effect on the institutional development of Mexico. The war partially removed the legal and economic barriers that protected the old oligarchic elites in Mexico and paved the way for the modernization of legal and commercial codes. The analysis exploits the within-country variation in the presence of US troops during the Mexican-American war across Mexican states and cities. Using propensity score and nearest neighbour matching techniques with orthogonal covariates, the paper presents evidence of the long-term institutional implications of the presence of troops. Troops-controlled areas have less complex business registration procedures, better quality of land administration, broader access to property rights, markedly better quality of the judicial process, and lower costs of enforcing contracts than the areas without troops’ presence. We show that the presence of US troops generated a positive and radical historical shock for institutional development that survived to the present day and made the return to the previous status quo nearly impossible. The positive effects of troops’ presence are robust to a variety of specification checks and are particularly large for smaller cities.
JEL Classification: C31, D74, N16, N46,