The University of Pennsylvania has traditionally been at the forefront of economics, and the Institute was established to enhance this leadership role. It was established in 1993 thanks to a generous gift from William P. Carey.

The first Director of the Institute was Professor Lawrence R. Klein, a Nobel Laureate, whose work provided the foundation for econometric forecasting and is now used as a basic tool by government and industry. According to Professor Klein's Nobel citation, "Few, if any researchers in the empirical field of economic science have had so many successors and such a large impact as Lawrence Klein." Following Professor Klein's retirement in 1991, between July 1995 and June 2000, the Institute was directed by Professor Kenneth I. Wolpin. Professor Wolpin is a pioneer in the development of new empirical methods and theoretical models for the study of labor markets, investments in human capital, and social policy. His work exemplifies the rigorous combination of theory, econometrics, and data that characterizes research at Penn.

From July 2000 through July 2011 and from July 2012 through June 2014, Professor Antonio Merlo, Professor of Economics, directed the Institute. The primary focus of Professor Merlo's research is in the area of Political Economy.

Beginning in July 2014 Professor Enrique G. Mendoza, Presidential Professor of Economics, assumed the role of director of the Penn Institute for Economic Research. His research is in international macroeconomics, particularly in the areas of business cycles, financial crises, government debt and default, international capital flows, and financial regulation. 

On October 25, 2014 a colloquium honoring the legacy of Lawrence R. Klein was held on campus.