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Some existing studies argue that indirect colonial rule adversely affects postcolonial development. To analyze the situation under which a colonial power adopts indirect rule to govern a colony, we analyze a delegation model wherein the colonial power decides whether to delegate policy choice to an agent who has an information advantage but has different policy preferences from that of the colonial power. The colonial power decides whether to delegate policy choice in multiple districts, and can acquire information by paying a cost in each district. We show that colonial powers are prone to adopt indirect rule when the heterogeneity among districts is high. The results are a possible explanation for why colonial powers utilized indirect rule in Africa, a region with high levels of ethnic diversity.

Developing countries experienced divergent economic development paths during the last half of the twentieth century: while some Asian countries experienced rapid growth, the economies in most Sub-Saharan African countries stagnated. Recent research has revealed that colonial experience is a critical factor in such divergent development experiences. In particular, direct and indirect colonial rules have entirely different effects on postcolonial development. While direct rule, under which colonial powers build centralized governing struc- tures to dominate entire region of colonies, favors postcolonial development by leaving effective state capacity, indirect colonial rule, under which autonomous governing power is delegated to indigenous rural elites, harms state building and growth after independence [^{1}

Sub-Saharan Africa has two notable features. The first feature is that most African colonies were ruled through indirect rule [

This paper provides a simple theoretical logic that links a colony’s heterogeneity and the form of governance by colonial powers. We incorporate two features into a standard delegation model in which a principal decides whether to delegate policy choice to an agent who has information advantage but has different policy prefer- ences from that of the principal (See [

Consider a colony with two districts: districts 1 and 2. Indigenous agents implement policies in each district. We call the indigenous agent in district

In district^{2} We assume that

Furthermore, the two random variables correlate with each other. We assume that

The payoff that the colonial power obtains in district

Decision making in district 1 precedes that in district 2. The timing of events in each district is as follows:

1) The colonial power decides whether to delegate policy choice to agent

2) The value of

3) If no delegation occurs, then the colonial power decides whether to acquire the information on the realized value of

4) Either the colonial power or agent

We derive the subgame perfect equilibrium of this game. In the following, we assume that the cost of infor- mation acquisition is sufficiently large. Under this assumption, the colonial power never chooses to acquire infor- mation in district 2.

Assumption 1

First consider the case where the colonial power delegates the policy choice to indigenous agent 2. Because the indigenous agent can observe the realized value of

Next, consider the case where the colonial power does not delegate the policy choice and acquires information on the realized value of

When the colonial power neither delegates the policy choice nor acquires information, its payoff in district 2 depends on whether the colonial power has acquired information on

^{3}Since choosing

^{4}We assume that

In the case where the colonial power knows that

^{3} Hence, the colonial power chooses

From the results in the previous section, in the case where the colonial power does not know the realized value of^{4} In the case where the colonial power knows the realized value of

The policy choice in district 1 is similar to that in district 2. If the colonial power delegates the policy choice, then it obtains

To derive the equilibrium, we first show the following preliminary results.

Lemma 1 If the colonial power delegates policy choice in district 1, then it delegates policy choice in dis- trict 2.

Proof. See Appendix.

Lemma 2 If the colonial power directly chooses a policy without acquiring information in district 1, then it does so in district 2.

Proof. See Appendix.

Lemma 3 If the colonial power acquires information in district 1, it directly chooses a policy without acquiring information in district 2.

Proof. See Appendix.

From the above results, depending on the values of parameters, three equilibrium-governance patterns are possible:

1) The colonial power delegates the policy choice in both districts.

2) The colonial power directly chooses policies without acquiring information in both districts.

3) The colonial power acquires information in district 1 and directly chooses policies in both districts.

Case 1 can be interpreted as indirect rule, and cases 2 and 3 are direct rules. The colonial power chooses a governance strategy that provides the maximum payoff. The colonial power obtains

which can be rewritten as

The degree of homogeneity

Proposition 1 Assume that the degree of policy uncertainty

・ The cost of information acquisition

・ The policy preferences of indigenous agents are close to that of the colonial power (

・ The policy uncertainty

・ The degree of homogeneity between districts

When the degree of heterogeneity is larger (i.e.,

To analyze the situation under which the colonial power adopts indirect rule to govern a colony, we analyze a delegation model wherein the colonial power decides whether to delegate policy choice to an agent who has an information advantage but has different policy preferences from that of the colonial power. The colonial power decides whether to delegate policy choice in multiple districts, and can acquire information by paying a cost in each district. We show that colonial powers are prone to adopt indirect rule when the heterogeneity among districts is high. The results are a possible explanation for why colonial powers utilized indirect rule in Africa, a region with high level of ethnic diversity.

I thank the referee for his/her comments.

Proof of Lemma 1

Proof. To show the contradiction, assume that the colonial power delegates policy choice only in district 1. In this case, the colonial power obtains ^{5} Because the colonial power chooses not to delegate in district 2,

Proof of Lemma 2

Proof. Assume that the colonial power directly chooses a policy without acquiring information in district 1 and delegates the policy choice in district 2. The colonial power obtains

Proof of Lemma 3

Proof. Assume that the colonial power acquires information in district 1 and delegates the policy choice in district 2. Then, the colonial power obtains