Losing Your Dictator: Firms During Political Transition
Political transitions are associated with significant economic changes, but little is known
about how firms fare across regimes. We study Chile’s transition to democracy and
show that firms in the dictator’s network make critical investments in physical capital
before the transition takes place. These investments are made possible by government
banks during the dictatorship and allow them to improve their market position in the
new regime. Our results show how market distortions can be transferred across regimes
and suggest limited changes in the distribution of economic power after a democratization.