This paper examines the persistent effects of colonial legal institutions (or Real Audiencia) in Mexico. Using a spatial regression discontinuity design, I find that households in regions exposed to stronger colonial courts exhibit higher historical and contemporary economic prosperity. In contrast to conventional wisdom, court records suggest that dispute resolution made property rights more secure for native populations and discouraged agrarian conflicts after Independence. Consistent with recent models of state formation, I document this crowded in bureaucratic and fiscal institutions over the long-run.