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.