This paper evaluates the importance of "property rights institutions," which protect citizens against expropriation by the government and powerful elites, and "contracting institutions," which enable private contracts between citizens. Using exogenous variation in both types of institutions driven by colonial history, the authors document strong first-stage relationships between property rights institutions and the determinants of European colonization (settler mortality and population density before colonization), and between contracting institutions and the identity of the colonizing power. Using an instrumental variables strategy, they find that property rights institutions have a first-order effect on long-run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. The authors suggest that individuals often find ways to alter the terms of their formal and informal contracts to avoid the adverse effects of contracting institutions but are unable to do so against the risk of expropriation. The paper uses two measures for property rights institutions: Political Risk Services' assessment of protection against government expropriation and Polity IV's constraint on the executive measure. For contracting institutions, they use data on legal formalism developed by Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2002, 2003). This variable measures the number of formal legal procedures necessary to resolve a simple case of collecting on an unpaid check or evicting a non-paying tenant. The authors find that greater legal formalism is a proxy for worse contracting institutions. The authors use a multiple instrumental variables strategy, exploiting colonial history as an ideal setup. The legal system imposed by colonial powers has a strong effect on the degree of legal formalism, and almost no effect on measures of property rights institutions today. At the same time, both mortality rates for potential European settlers and population density in 1500 have a large effect on current property rights institutions, and no impact on measures of legal formalism. The results show that property rights institutions have a strong effect on current economic outcomes. Countries with greater constraints on politicians and elites, and more protection against expropriation by these powerful groups, have higher income per capita, greater investment rates, more credit to the private sector relative to GDP, and more developed stock markets. In contrast, contracting institutions have a more limited role. Countries with greater legal formalism have less developed stock markets. However, once property rights institutions are controlled for, legal formalism has no impact on income per capita, the investment to GDP ratio, and the private credit to GDP ratio. These results suggest that contracting institutions affect the form of financial intermediation but have less effect on economic growth, investment, and the overall level of financial development. The authors argue that society can function in the face of weak contracting institutions without first-order economic costs, but has a much harder time dealing with a significant risk of expropriation from the government or other powerful groups. The paper also discusses the limitations of the analysis, including the interactionThis paper evaluates the importance of "property rights institutions," which protect citizens against expropriation by the government and powerful elites, and "contracting institutions," which enable private contracts between citizens. Using exogenous variation in both types of institutions driven by colonial history, the authors document strong first-stage relationships between property rights institutions and the determinants of European colonization (settler mortality and population density before colonization), and between contracting institutions and the identity of the colonizing power. Using an instrumental variables strategy, they find that property rights institutions have a first-order effect on long-run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. The authors suggest that individuals often find ways to alter the terms of their formal and informal contracts to avoid the adverse effects of contracting institutions but are unable to do so against the risk of expropriation. The paper uses two measures for property rights institutions: Political Risk Services' assessment of protection against government expropriation and Polity IV's constraint on the executive measure. For contracting institutions, they use data on legal formalism developed by Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2002, 2003). This variable measures the number of formal legal procedures necessary to resolve a simple case of collecting on an unpaid check or evicting a non-paying tenant. The authors find that greater legal formalism is a proxy for worse contracting institutions. The authors use a multiple instrumental variables strategy, exploiting colonial history as an ideal setup. The legal system imposed by colonial powers has a strong effect on the degree of legal formalism, and almost no effect on measures of property rights institutions today. At the same time, both mortality rates for potential European settlers and population density in 1500 have a large effect on current property rights institutions, and no impact on measures of legal formalism. The results show that property rights institutions have a strong effect on current economic outcomes. Countries with greater constraints on politicians and elites, and more protection against expropriation by these powerful groups, have higher income per capita, greater investment rates, more credit to the private sector relative to GDP, and more developed stock markets. In contrast, contracting institutions have a more limited role. Countries with greater legal formalism have less developed stock markets. However, once property rights institutions are controlled for, legal formalism has no impact on income per capita, the investment to GDP ratio, and the private credit to GDP ratio. These results suggest that contracting institutions affect the form of financial intermediation but have less effect on economic growth, investment, and the overall level of financial development. The authors argue that society can function in the face of weak contracting institutions without first-order economic costs, but has a much harder time dealing with a significant risk of expropriation from the government or other powerful groups. The paper also discusses the limitations of the analysis, including the interaction