Losing Your Dictator? Firm Investment during Chile’s Transition to Democracy

Can firms transfer distortions across political regimes? Using novel data and network analysis, this project studies how firms behave during Chile’s transition to democracy. Results find that companies linked to the dictatorship were less productive than their counterparts before the transition, but improved their market position using political ties. This was reflected by increased productive capacity, higher profits, and more loans from state-owned banks during Chile’s democratic transition. These findings suggest that distortions can, in fact, be transferred across political regimes. Researchers also test for different explanations and suggest that connected firms aimed to shield their market position for the transition. Though Chile’s democratization was a unique process, findings from this study provide a valuable starting point to evaluating the behavior of firms during political transitions more broadly.