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Losing your dictator: firms during political transition


We use new firm-level data from Chile to document resource misallocation in favor of politically connected firms during the transition from dictatorship to democracy. We find that firms with links to the Pinochet regime (1973–1990) were relatively unproductive and benefited from resource misallocation under dictatorship, and those distortions persisted into democracy. We show that, after learning that the dictatorship was going to end, firms in the dictator’s network increased their productive capacity, experienced higher profits, and obtained more loans from the main state-owned bank. We test for different explanations and provide suggestive evidence consistent with connected firms aiming to shield their market position for the transition to democracy.

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  1. On average, there were four transitions to democracy per year in the 25-year period from 1988 to 2013 (Figure A.1). A large literature studies the effects of political regimes on economic variables. See Acemoglu et al. (2019) for a recent discussion.

  2. A large body of work shows that firms benefit from having connections to the state (e.g. Fisman 2001; Khwaja and Mian 2005; Faccio et al. 2006; Jayachandran et al. 2006; Mobarak and Purbasari 2006; Claessens et al. 2008; Cingano and Pinotti 2013; Colonnelli and Prem 2017).

  3. We call “transition” the period when it was known the dictator was leaving but he was still in power, and “democracy” the period when the democratic government is in power. The former has been called a “lame duck” or “interim” period (Linz and Stepan 1996; Dell 2015).

  4. One third of democratizations since 1800 occurred because of deliberate decisions made by incumbents. Two thirds happened because incumbents attempted to consolidate their power but failed. According to data collected by Treisman (2017), the most common of these attempts has been calling for elections and losing.

  5. See also Barro (1996), Tavares and Wacziarg (2001), Rodrik and Wacziarg (2005), Persson and Tabellini (2006), Papaioannou and Siourounis (2008), Murtin and Wacziarg (2014) among many others.

  6. Importantly, not all privatized firms were linked to Pinochet and not all firms linked to Pinochet were privatized. Thus, we can account for the effect of privatizations and differentiate it from the effect of links to Pinochet.

  7. According to declassified documents posted by the U.S. National Security Archive, Pinochet stated, “I’m not leaving power, no matter what.” Different political forces (including the navy) pushed him finally to accept the result (Huneeus 2006).

  8. Price Waterhouse was in charge of estimating this value. Bardón and his team were investigated for state fraud in 1991. In a controversial ruling, the Supreme Court decided to exonerate them. Leon-Dermota (2003) argues that this exoneration is an example of Pinochet’s power in the new democratic era.

  9. Others have classified political connections similarly (e.g., Fisman 2001, Bertrand et al. 2007, Acemoglu et al. 2016). We present details about links in Appendix B. Measurement error is unlikely to be relevant because firms had on average 10 board members and most connected firms had multiple connections. Hence, to code a connected firm as unconnected we would have to miss several connections simultaneously.

  10. The distinction between direct and indirect links is novel but it does not drive our results. Unfortunately, our relative small sample prevents us from studying 3rd degree connections and beyond. Table A.1 presents an example of a firm with a direct link and Table A.2 presents the number of firms per link type and industry.

  11. One might worry that firms in the energy sector anticipated increased demand after the plebiscite and decided to increase their productive capacity accordingly. Including industry-period fixed effects addresses this type of concern.

  12. Any firm that is not part of a business group is assumed to be a business group on its own. There are 104 clusters in our dataset.

  13. Girardi and Bowles (2018) use the same data to estimate the effect of Allende’s election in 1970 and Pinochet’s coup in 1973 on the Santiago stock market. In terms of magnitude, the “NO” victory in the 1988 plebiscite is one of the largest drops in the history of the Santiago stock market.

  14. In contrast, the opposition victory in the 1989 presidential election was expected and did not cause significant changes in the stock market (Figure A.3-C). Table A.4 presents regression estimates.

  15. On the one hand dispersion in revenue productivity within industry could be explained by overhead costs, adjustment costs, or an increase in competition under financial constraints (Bartelsman et al. 2013; Asker et al. 2014; Galle 2019). On the other hand measured misallocation could be partially explained by measurement error (Bils et al. 2018) and model misspecification (Albagli et al. 2019).

  16. The average firm had debt with five banks under dictatorship and this number did not change for linked firms after the plebiscite.

  17. For example, if \(\beta _{tran}>0\) and \(\beta _{tran}+\omega _{1,tran}>0\), then connected firms were increasing their total debt using state banks. In contrast, if \(\beta _{tran}>0\) and \(\beta _{tran}+\omega _{1,tran}=0\), then firms with direct links might have been substituting debt from private banks to the state bank. We emphasize that this analysis needs to be interpreted with caution because the use of monetary units in the dependent variable, an in a panel data setting, might entail cross-section and time-series heteroskedasticity with potentially finite support.

  18. To understand additional sources of funding we also explored changes in stocks and bond issuances. However, we did not find any significant differences explained by links to the regime (Table A.5)

  19. To measure these links we used the methodology in Appendix B but replaced the word “Pinochet” with the word “Concertacion.” We identified seven firms that substituted links between 1988 and 1992.

  20. Reassuringly, we observe an increase in firm entry after democratization in Chile. See Figure A.6.

  21. However, investments might also take place to capture local institutions or to improve efficiency in production and we cannot distinguish between these. In addition, note that in the model the ability of connected firms to invest comes from preferential access to credit, but empirically we cannot precisely pin down the sources of funding.

  22. We also read the Sunday edition of the main newspaper in the country and found similar evidence of positive expectations about the future and limited changes in the policy platform around the plebiscite (newspaper editions from July 30 of 1988 until December 30 of 1988).

  23. Appendix C discusses two additional explanations that are inconsistent with the data. Namely, the potential targeting of firms to game the transition and the use of firms to extract rents before the dictatorship is over.


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Correspondence to Felipe González.

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March 2020. We would like to thank Shai Bernstein, Nick Bloom, Arun Chandrasekhar, Emanuele Colonnelli, Loreto Cox, Ernesto Dal Bó, Dave Donaldson, Pascaline Dupas, Liran Einav, Fred Finan, Solomon Hsiang, Guido Imbens, Borja Larrain, Jeremy Magruder, Guillermo Marshall, Edward Miguel, Melanie Morten, Petra Moser, Suresh Naidu, Josh Rauh, Andrés Rodríguez-Clare, José Tessada, Francisco Urzúa, Juan Vargas, Alonso Villacorta, and seminar participants at UC Berkeley, PUC-Chile, Stanford, Universidad de Chile, Universidad de Los Andes, Universidad de Los Andes, Universidad Javeriana, Universidad del Rosario, the 2014 Annual Meeting of the Chilean Economic Society, and the 2015 Development and Political Economy Conference for comments and suggestions. We are grateful to the Center for Effective Global Action, Fondecyt (Project 11170258), Stanford Center for International Development, and the Economic History Association for financial support.

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González, F., Prem, M. Losing your dictator: firms during political transition. J Econ Growth 25, 227–257 (2020).

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