Luck, Human Agency, and Micro Institutions in Colonial

Fernando Zanella United Arab Emirates University Dept. of Economics and Finance P. O. Box 17555 United Arab Emirates [email protected]

and

Christopher Westley Jacksonville State University Dept. of Finance, Economics, and Accounting 700 Pelham Road, North Jacksonville, Alabama 36265 [email protected]

Abstract

Institutions, in a broad sense, are widely recognized as determinants of economic growth. However, individual behavior and micro institutions are sometimes overlooked by institutional economists in their search for broad patterns. At times, such outcomes are a weak reductionism of truly complex phenomena. Historians do pay more attention to individuals and historical idiosyncrasies, but not necessarily they master the economic tools. This paper explains the success of ’ earlier settlements as a mix of accident and design— a combination that greatly impacted trade, the conquest of the West, the definition of property rights and economic growth. By doing so, it stresses the limitations of applying an aggregate institutional interpretation of economic history and development. This paper applies the principal-agent model and its main feature, i.e., risk-sharing—an extreme case where the settlers and natives were risking their own lives while the Portuguese was seeking to reduce risks and transaction costs to maintain its Empire. Portuguese agents were extensively used to reduce uncertainties, to cut deals with the natives to secure settlements, to combat the Frenchmen, and to boost trade.

JEL: B, N, O

Key Words : Institutions ; Brazil Colonial ; Principal-Agent ; Settlers

1. Introduction

Brazil’s first settlement, San Vicente, was led by Martin Alfonso de Souza, who received a land grant from the Crown called captaincy. Three days after the Portuguese arrived on the Brazilian coast, they were prepared to fight a large group of approaching natives. Instead, a naked man came from the natives’ side and introduced himself. He was a Portuguese man, João Ramalho, who had been living there for 20 years after his ship sank in 1512. He was accepted by the local Indians, the Tibiriçás, and married the chief’s daughter. He told the Portuguese that he could keep the peace under certain conditions, including informal rules on property rights. As a result, San Vicente became the most successful settlement; it was in the area of today’s Sao Paulo, the richest state in Brazil. The Captaincy of San Vicente became a successful settlement because of an historical accident—an outcast living among the natives who acted as a broker to avoid war, to established a basic set of informal rules, and to boost trade.

Further north, not by accident but by Portuguese design, another settlement was also successful in establishing peaceful and trade-heavy relationships with some tribes. The captaincy was owned by , who arrived in 1535. He fought several battles against the natives and his captaincy was a little more than a fort. Again, a Portuguese living among the natives, Vasco Fernandes Lucena, acted as a broker between the parties. Unlike the situation of João Ramalho, his life among the natives was not pure accident. Lucena was one of dozens of dropped off on Brazilian shores several years earlier by Portuguese ships. Degredados were convicted in —usually for political and religious reasons—and had their convictions waived in exchange for a chance to learn the language and customs of the natives of the . However, they often ended up cannibalized. The Portuguese typically expected them to act as agents for the their eventual arrival. Vasco Fernandes Lucena was one of the successful survivors.

Institutions, in a broad sense, are widely recognized as determinants of economic growth. However, individual behavior and micro institutions are sometimes overlooked by institutional economists in their search for broad patterns. At times, such outcomes are a weak reductionism of truly complex phenomena. Historians do pay more attention to individuals and historical idiosyncrasies, but not necessarily they master the economic tools. The objective of this paper is to explain the success of Brazilians’ earlier settlements as a mix of accident and design— a combination that greatly impacted trade, the conquest of the West, the definition of property rights and economic growth. By doing so, it stresses the limitations of applying an aggregate institutional interpretation of economic history and development. The article is structured as follows. Section two reviews the literature and sheds light on some methodological issues. Section three describes the earliest settlements in Brazil and the role of agents who negotiated peaceful solutions with the natives. The conclusion stresses the importance of a micro institution, i.e. the agent, to reduce risks and transaction costs during initial settlements.

2. Literature Review

Institutions are largely recognized by scholars as determinants of economic development; vast differences in a nation’s economic development over time have been explained by a predominance of institutional factors, factor endowments, or some sort of combination thereof. North (1981), Ekelund & Tollison (1981), and Hayek (1982) emphasize that poor institutions lead the use of the government apparatus for rent extraction, thus hindering economic growth. Engerman & Sokoloff (2000) point out that the role of institutions may be overplayed, and that factor endowments are important to explain performance asymmetries. Demsetz (2000) suggests that factor endowments play a determinant role during the initial stages of development, while set up institutions are predominant in a second phase.

Religion has long been pointed out as an important institutional factor. Protestant predominance leads to growth due to its friendly understanding of . The U.S. case is a common example. Moog (1964) states that Protestants in the U.S. were hard workers seeking wealth accumulation, while Catholic settlers in Brazil were opportunistic raiders. The legal system is an additional institutional feature that has been addressed by authors like La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999); these scholars divide commercial law into five groups: common law, French civil law, German civil law, Scandinavian law, and socialist law. They found that countries that abide by French or socialist laws exhibit inferior government performance. Interestingly, they add a new attribute to their findings: religion predominance. La Porta et al. found that countries with a high proportion of Catholics or Muslims also exhibit inferior government performance. Recently, in an influential paper, Acemoglu, Johnson and Robinson (2001) positively associate high mortality rates faced by European colonialists with poor long-run institutions. That is, where settlers faced high mortality rates, they were more likely to set extractive institutions instead of typical wealth enhanced European ones. Somewhat related with such approach are the geographical explanations where, for instance, tropical diseases or trade distances are predominantly accounted for: distance from the equatorial line is often used as a proxy. Some examples of this line of work are Easterly & Levine (2003) and Sachs (2003).

Institutional explanations, although broadly accurate, still fail to come to grips to explain such distinguished countries’ performances. For instance, despite Protestantism being considered more business-friendly, mercantilism flourished in the Catholic Italian cities of the XIV and XV century. In fact, several naval expeditions were financed by merchants of Florence, including some to the Brazilian coast. Moreover, even among Catholic nations, differences are substantial. Jesuits in Brazil, unlike other Catholic countries, played a key role during the earlier settlements by trying to Christianize and protect natives and by creating a vast wealth in the order. Furthermore, despite the nature of the Portugal positivist legal system, the same system was systematically open to precedent—mainly the Crown’s urge to flexibly the law to use degredados overseas (Coates, 2001). Rodrik (2008) stresses that informal arrangements, or second best institutions, are overlooked when compared with formal legal systems as, for example, are the cases of Ghana and Vietnam. Additionally, as pointed out by Engerman & Sokoloff (2000) and Coastworth (1998) the Caribbean had a rich diversity of islands regardless of European , i.e., legal and religious background; the Caribbean was a mixed bag of institutional features.

Coastworth (2005, 2008) goes further to point out that inequality—landownership concentration—was not much different during the colonial period between Spanish and British . This is an intriguing point considering that rent-seeking is associated with an unequal society and a strong extractive government. Finally, the spread of diseases were highly correlated with the slave trade (Alden & Miller, 1987). Epidemics in Brazil—e.g., smallpox and measles— coincided with outbreaks during the periods of drought and famine in West , and Mozambique, all slave supplier countries. Disease outbreaks mainly caused death among natives and black slaves, but also affected settlers. Brazil colonial authorities tried unsuccessfully to contain these epidemics by quarantines of arriving slaves. This fact suggests that settlers’ mortality rates were likely the result of extractive institutions in place, not the other way around. If so, more research is needed. This hypothesis is supportive of Engerman & Sokolloff’s (2000) type 1 economy of of and , where slaves were in high demand. Finally, Rodrik, Subramanian and Trebbi (2004) state that geography variables are convenient instruments, but not an adequate explanation.

Hayek (1964) in his Theory of Complex Phenomena points out that a natural tendency of scientists’ inquisitive minds is to search for patterns. The likelihood of successfully identifying a particular regularity depends on the complexity of the phenomena. The degree of complexity is identified by the number of distinctive variables through which a phenomenon can be reduced. It may be that to pursue the identification of a few main factors that jointly explain distinctive national growth patterns is, although fascinating, an unachievable task at this point. Conceivably, that is the fundamental reason why economists have been unable to single out a few variables that explain development across countries and time.

In economics, scientists adopt a few assumptions considered to be universal, i.e., individual wealth maximization. However, it is debatable whether it is possible to identify a common development pattern that stands even when applied to the entire world. It is our understanding that micro institutions have been more successful when applied to identify specific cases in particular periods, perhaps because it requires a less ambitious objective. A perfect fit, where an institutional feature could be singled out to explain economic performance, is done by Banerjee & Iyer (2005). The authors found that different property rights—landlord- and non- landlord- based—resulted in different outcomes in . Within Hayek’s context, it is possible to say that they manage to address a not-so-complex phenomenon where the possibility of successfully singling out variables is more likely. This less-ambitious approach is the opposite of trying to single out variables in a world-wide study throughout time. In the words of Banerjee & Iyer: “An obvious advantage of focusing in one particular country is that it makes it easy to locate the source of the difference, relative to the case where there is a complex of institutions that are all different” (2005, 1191). This paper, perhaps classified as a “micro institutional”, focuses in the principal-agent role for enhancing the trade relationship between the Portuguese and the natives. The Agency Theory has its roots in risk-sharing (Arrow, 1971). Formally, it was described by Ross (1973) as the principal problem. Since then, the principal-agent model has been widely used in the fields of finance, management, politics, sociology and, naturally, economics. The model states that principals set (in)formal contracts with agents to represent their interests, mainly to reduce transaction costs. But the agent might not act as expected by the principal, by seizing the opportunities created by asymmetric information. Despite being widely used, there is some evidence that the model assumptions should be relaxed, e.g., Rasmussen (2005). Specifically in regard to economics history, the principal-agent theory and its underlying set of incentives proves powerful in explaining the demise of the English and North-mercantilism, while keeping it intact during Imperial Brazil, as per Ekelund and Tollison (1997) and Zanella, Ekelund and Laband (2003).

This paper loosely applies the principal-agent model. This is because of the scattered information and idiosyncrasies of the sixteenth-century settlements. Nevertheless, the approach is still based on the model’s original roots, i.e., risk-sharing—an extreme case where the settlers and natives were risking their own lives while the Portuguese was seeking to reduce risks and transaction costs to maintain its Empire. The following section addresses the very first settlements in and their dealings with the natives through a Portuguese business practice of establishing communications by using degradados as agents. Those agents’ performances were determinant for the settlements’ success or failure. Brazilwood, the sugar trade and conquest of the Brazilian west were the direct results of the agents’ roles.

3. The initial contacts, settlements and the role of the brokers

During the fifteenth century, the Portuguese had a unique expertise in navigation. Portugal was the homeland of the Order of Christ, the followers of the Knights Templar and the most famous of the warrior-monks. This secret order began during the Crusades in 1119 and its rules were known only by the Grand Master of the Order and the Pope. During the Crusades, the order possessed several properties and conducted economic activities1. Also, its members had

1 For another point of view see: Ekelund et al (1996, 146-47). control over the finances of several countries. The King of , Felipe IV, was in debt to the order; he made an agreement with the Pope Clement, a Frenchman, to arrest and kill those who resisted his orders. That day became known as “Black Friday.”

Eventually, many members were burned to death via the Inquisition. The Inquisition spread throughout Europe and the remaining members of the order found a King that gave them protection: King Dom Diniz of Portugal. In 1317, the order changed its name to the Order of Christ. In 1319, Pope João XXII acknowledged its existence. Portugal benefited from the order’s strict organization and business experience, including in the route trades to the East—a significant human capital boost to Portugal. The Sagres Nautical School is rooted in the order. The order was so important to Portugal and its trade/navigation business that the ship that discovered Brazil had one of its knights as its captain: Pedro Alvares Cabral. The first flag in Brazil was not Portuguese, but the Order of Christ flag—a white flag with a red cross in the middle.

Thus during the fifteenth century, Portugal was a leader of maritime exploration— notably to India, Africa, the Atlantic islands of , Canarias, and , and even America. Navigation proficiency allowed Portugal to draw maps of the New World before other nations did. A map of Brazil existed as early as 1493. Even a map of Canada and the U.S. existed as early as 20 years before Columbus arrived there. In fact, aware of the Portuguese claims on the new lands, Columbus stopped on his way back to in Portugal to talk with the King. The goal was to minimize the increasing tension between the two nations. In 1494, the Pope, mediating the conflict, declared a treaty over the division of the new lands between Portugal and Spain. The Tordesilhas Treaty, which followed the Papal bull of Inter Caetera, gave Portugal rights to claim new lands2.

Before landing in Brazil, Portugal had learned the importance of translators and cultural brokers while dealing in India and Africa. was mapped by the Portuguese, which had several business ports along its coast. Prince Henry the Navigator (a governor of the Order of Christ) is credited for most of the early European maritime expansion. It was a common Portuguese practice to capture natives in Africa, take them to Portugal to learn the language and

2 This is in contrast with the International Law that was set in place a couple of centuries later. It guided the settlements in Australia, the terra nullis, or nobody lands (Pateman & Mills, 2007). customs, and then return them in the hopes for an understanding between the parties. Information-gathering was a must for the outnumbered Portuguese. They clearly understood the hazards of asymmetric information.

The fundamental agents for the Portuguese in the new world were the degredados. Degredados were Portuguese convicted for religious (often being New Christians, i.e., Jews), political, sexual, or financial crimes. Importantly for the principal-agent model, degredados were not slaves, and even when condemned some of them were paid by the crown, e.g., those working in the galleys.3 In fact, the degredados held such importance for the that in 1534 King D. João III issue a decree forbidding the beating of them (Coates, 2001). Usually, a ship carried between 10-12 degredados for future drop-offs (Abreu, 1997).

The diary of Cabral’s first trip to Brazil—written by Caminha—records an officers’ meeting where the capture of natives was discussed, but not approved. Cabral met friendly natives, but communication was impossible. Instead of capturing them, Cabral decided to use the “agents” on board, two degredados. The two men had been condemned to death in Portugal but had their punishment revoked in exchange for their roles as agents of the Portuguese. The Portuguese fleet left soon thereafter, and as planned4, left their agents with the natives. A few years later, reportedly one of the degredados helped a Portuguese ship to negotiate with the natives.

The agents (in this study, mainly degredados) were certainly noticed in several earlier settlements around the world; Pocahontas acquired a mythical status for helping the first settlements in Jamestown (VA); sometimes agents were named transfrontiersmen (Isaacman & Isaacman, 1975), interpreters (Hagedorn, 1988), cultural brokers (Richter, 1988), go-betweens (Metcalf, 2005), and so on. Here we identify them as agents due to their role in carrying out instructions of the Principal (Portuguese) to facilitate trade and settlements by gathering information and minimizing transaction costs. However, as we shall see later, several if not most of them, became brokers by trying to forge a common ground between Portuguese and the

3 Unlike the British crown, the Portuguese seems to understand the role of incentives by paying its agents to reduce opportunistic behavior (Zanella et al, 2003). 4 Caminha’s trip diary (1963 [1500]) often mention the degredados’ involvement with the natives, and how the expedition expected them to stay with them to learn the language and customs. natives—a deal that had mutual benefits. Actually, some of them, outcasts and degredados alike, became so integrated into the natives’ lifestyle that they refused to return to Portugal, despite promises of rewards and even financial compensation. The set of incentives turned in favor of the natives because of several factors: their healthy life compared with that in Portugal in the Early modern Europe5; their business opportunities, including the slave trade (capturing and selling rival natives to the Portuguese); and a liberal sexual life—it was a tribal practice to offer a family member in marriage to a Portuguese. This was a way of creating a tribal bond with a newcomer and to have some assurance on where the Portuguese fidelity would lies with. The Portuguese usually married the Chief’s daughter plus several secondary spouses. Therefore, in this paper those intermediaries will be called brokers, and sometimes agents, depending how they acted.

Amerigo Vespucci led the second expedition to Brazil in 1501. The first encounter happened without any intermediary, since his crew didn’t land where the degredados were left by Cabral. After initial contacts, and gifts to the tribe ashore, two men went missing after leaving with the natives. After a week, a third man went ashore to contact the natives and ended up cannibalized in full view of the crew on the ship. Vespucci sailed south and finally met one of the degradados dropped off by Cabral, who facilitated communications and trade with the natives. After that, Brazil was just sparsely visited by the Portuguese.

It’s likely that Vespucci (Bueno, 1999) left a in the south of Brazil who became known by future expeditions as the bacharel of cananeia. He was probably Cosme Pessoa, a new-Christian exile. He married at least six natives and headed a small native army. Bacharel became an important slave trader and ship supplier south of San Vicente (Sao Paulo). He also assisted expeditions in search of the Incan “white king”, and his “ mountain.”6. The Portuguese were suspicious of his links with the Spanish and tried to dominate him. But the bacharel of cananeia rejected the Portuguese authority; he attacked a settlement in 1536 and killed his former friend Henrique Montes, an earlier outcast in , now allied with the Portuguese. He then fled, never to be found.

5 Joao de Ramalho, the most famous broker, reportedly died in 1580 in his nineties, quite an achievement for a sixteenth-century European. 6 The white king was finally discovered by the Spaniard Francisco Pizzaro in 1532. The discovery supplied Spain with and silver for several years after. Brazil was the land of brazilwood, a tree that provided a reddish in high demand by the emergent European textile industry. Brazil belonged to Portugal according to the Tordesilhas treaty of 1494. France, however, had been exploring the Brazilian coast at the same time as the Portuguese. In 1532 the Portuguese captured the French ship Peregrina. The ship contained 15,000 logs of brazilwood, 3000 jaguars’ furs, 600 parrots and spices (Bueno, 1999). This fact triggered the Portuguese Crown’s decision to effectively occupy Brazil; the crown feared loss of control of its to France. Brazil was divided into 15 Capitancias (12 owners), horizontal pieces of land available to anyone who had money and an interest in exploration. The recipients had to pay the king’s fifth on all metals. The captaincy owner had the right to give land grants to settlers (sesmarias) if they fulfilled the conditions of being a Christian and agreed to pay a tithe to the Order of Christ; in exchange, the recipients had to pay the tenth and twentieth on certain items (Marchant, 1942). Brazilwood, drugs and spices were kept as crown monopolies, which redirected settlers’ efforts toward sugar cane mills.

The most successful captaincy was of San Vicente of Martin Afonso de Souza. João Ramalho, a shipwreck survivor, had been living with natives for decades before de Souza’s expedition arrived. He had married the Tibiriçás chief daughter in addition to several others. He was believed to be able to quickly mobilize an army of at least 2000 warriors. He told de Souza that he could keep the peace between the Portuguese and natives—under certain rules. They agreed. The capitania was divided into two parts. The Portuguese kept the coastal part and allowed the Indians to fish. However, the Portuguese could not trespass into the hills without the agreement of João Ramalho, who soon got the of Capitão-mor. These market features, including an important and informal agreement about property rights, led to an increase in exchange between the two parties. For instance, to marry a Portuguese was common for a native woman. Also, soon the capitania had engenhos, that is, sugar cane plantations and mills. The captaincy, with Ramalho’s consent, developed further into the hinterland, with crops, cattle and sugar mills.

João Ramalho had dozens of children with natives. Additionally, most of the Portuguese were single men who also sired children with natives. The off-spring, mulattoes, were knowledgeable of both customs and geography, and would become the spearheads of future incursions to capture natives of other tribes for work as slaves at the sugar mills. Those incursions created new paths and, consequently, supplying outposts along their way that evolved to became towns, where cattle raising and crops cultivation were common. Those entrances, the bandeiras, were responsible for the conquest of the Brazilian west, way beyond the tordesilhas treaty. Brazil’s initial territories were roughly equivalent to the initial 13 American colonies. Nevertheless, due to the bandeiras—and the role of the mulattoes—most of Brazil’s territory was conquest by 1640, and later internationally recognized by the utis possessis (useful possession) rule. In contrast, the U.S. settlers only crossed the Mississippi River after the acquisition of Louisiana in 1804 (Zanella & Westley, forthcoming).

João Ramalho, unlike the degredado bacharel, kept assisting the Portuguese despite adopting the natives’ lifestyle. For instance, Ramalho and his sons led several war parties against tribes hostile to the Portuguese—tribes in which Frenchmen, the truchements, had established relationships and were living amongst. A detailed account of the enemies’ tribes and the Frenchmen is provided by a mercenary German captured by these tribes. Staden (1930[1557]) lived among them for several months before his escape, and published a detailed account that included cannibalism. Staden narrative also gives indications that his survival was just a result of the imponderables.

The second and last successful captaincy was owned by Duarte Coelho, who arrived in 1535. He faced several fights against the local natives and his capitania was little more than a fort. Finally, he was able to contact another Portuguese degredado living among the Indians of the tribe Tabajaras. This Portuguese man was Vasco Fernandes Lucena, who established an agreement between the sides. The Tabajaras became allies of the Portuguese against the other tribes. Finally, the Capitania could organize economic activities, build sugar mills, give land grants to the settlers and establish transactions with the natives. As was customary, the son of Duarte Coelho married a native and conducted expeditions against the enemies of Tabajaras in order to obtain slaves for his capitania. The captaincy became very important for the sugar cycle, which caused the colony economy to boom. Duarte Coelho became one of the wealthiest men in Brazil. The captaincy had fifty mills and several sugar fields (Marchant, 1942).

The last capitania to feature a Portuguese agent living among the natives was the capitania owned by Francisco Pereira Coutinho. The Portuguese Diogo Álvares Correa, called “,” lived among the Tupinambás. Caramuru didn’t have the same influence as did João Ramalho and Vasco Lucena. Coutinho did not accept the terms for peace and engaged in raids throughout the Tupinambás territory. Ultimately, the capitania’s defense was defeated and Coutinho was killed by the natives. Caramuru later in 1549 became an important ally of the first general governor of Brazil, Tome de Souza.

Four captaincies were never settled. In all other capitanias, where there were no agreements about property rights, war took place and the outnumbered Portuguese were defeated. The lack of agreement could be due to a communication problem, because a Frenchman was living among the natives or because at least one of the sides considered the land as a case of “common-pool” in which the possession by the rule of “first-come, first-serve” or the rule of “the stronger” could take place7. As a result, those capitanias were not effectively occupied, or were destroyed. An example of a negative role played by a degredado is the captaincy of Espirito Santo owned by Vasco Fernando Coutinho. During a trip he left the degredado D. Jorge de Meneses, an ex-nobleman, in charge of the captaincy. Meneses had become a degredado due to his brutality while ruling the Island of Tenarte in Asia. He decided to capture natives to work as slaves in his sesmaria (land grant). His acts prompted a brutal reaction; the captaincy was destroyed and the settlers killed by the natives.

4. Conclusion

Individual behavior and micro institutions are sometimes overlooked by institutional economists in their search for broad patterns. Occasionally, such research outcomes are a weak reductionism of truly complex phenomena. This paper applies the principal-agent model and its main feature, i.e., risk-sharing to show that the success of Brazilians’ earlier settlements was due to a combination of historical accidents and a Portuguese design— a combination that greatly impacted trade, the conquest of the West, the definition of property rights and economic growth. By doing so, it stresses the limitations of applying an aggregate institutional interpretation of economic history and development. The challenge for the empirical literature on institutions is to explore these patterns without falling into the trap of reductionism or of historical and geographical determinism. Or, as Rodrik (2004) pointed out: “the process through which

7 For cost-benefit analyses of war or peace/trade see Anderson & McChesney (1994) and Leeson (2007). countries acquire “good” institutions is typically quite idiosyncratic and context-specific. Luck plays an important role, as does human agency.”

By Portuguese design, degredados were extensively used as agents to reduce uncertainties, to cut deals with the natives to secure settlements, to combat the Frenchmen, and to boost trade. Those successful settlements were prime locations for the brazilwood cycle and, most important, the sugar cycle. Historical accidents, like outcasts, cannot be used for policy prescription, but they must be used to understand the past. By accident or by design, the Portuguese agents were undisputable crucial for Portugal and the success of its Brazilian colony. Much research still needs to be done. The Portuguese policy affected future institutions in Brazil or it was typical of the Portuguese institutional background? Is it possible to draw world-wide generalizations? Probably the answer is in the negative. Nevertheless, it is clear that agents were singled out as an important variable.

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