This chapter, authored by Daron Acemoglu, Simon Johnson, and James A. Robinson, argues that differences in economic institutions are the fundamental cause of cross-country differences in economic development. The authors review empirical evidence from historical quasi-natural experiments, such as the division of Korea and European colonization, to highlight the importance of institutions. They develop a framework to understand why economic institutions differ across countries, emphasizing that they shape incentives and outcomes. Economic institutions are endogenous, determined by collective choices, and often conflict with political power, which is also endogenous and influenced by the distribution of resources. The authors discuss the role of political institutions in shaping economic institutions and the distribution of resources, and illustrate their framework with historical examples. They conclude by discussing the implications of their theory for understanding economic growth and suggesting future research directions.This chapter, authored by Daron Acemoglu, Simon Johnson, and James A. Robinson, argues that differences in economic institutions are the fundamental cause of cross-country differences in economic development. The authors review empirical evidence from historical quasi-natural experiments, such as the division of Korea and European colonization, to highlight the importance of institutions. They develop a framework to understand why economic institutions differ across countries, emphasizing that they shape incentives and outcomes. Economic institutions are endogenous, determined by collective choices, and often conflict with political power, which is also endogenous and influenced by the distribution of resources. The authors discuss the role of political institutions in shaping economic institutions and the distribution of resources, and illustrate their framework with historical examples. They conclude by discussing the implications of their theory for understanding economic growth and suggesting future research directions.