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Economists generally treat institutions as exogenous and examine their impact on the economy. But institutions, which define the “rules of the game” in an economy and the payoffs to pursuing different strategies, can change over time. Understanding the forces that prompt changes in institutions and how the payoffs to strategies change in response to institutional changes is important for understanding the developmental pattern of societies. For example, explicit contracts may be the most efficient means of structuring transactions under one institutional regime, but less formal agreements with entirely different enforcement mechanisms may be most efficient under another. Different ways of structuring transactions may lead to different growth paths. In this paper we examine the rise and decline of paternalism in Southern labor relations. By “paternalism” we mean an implicit contract whereby workers exchange dependable labor services for a variety of goods and services. “Dependable” implies a long-term commitment to an employer that transcends the textbook notion of spot-market exchange. In return, workers receive such goods and services as credit, housing, medical and old-age assistance, and most importantly, protection from acts of violence. Paternalism, we argue, emerged along with a particular institution – the system of social control that emerged in the late 19th century and characterized the American South during the first half of the 20th century.
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