This project measures the effect of political democratization on private sector economic organization in Chile and Mexico using firm- and industry-level data. Economic organization is defined broadly to include the organization of power within firms (corporate governance), and the degree of competition between firms. Economic organization matters because it influences a country's overall competitiveness and its prospects for economic development.
The arguments establishing a long-run relationship between political institutions and economic development are well-known (Engerman and Sokoloff, 1997; Acemoglu, Johnson, and Robinson, 2001), and recent scholarship ties democratization to growth using sophisticated panel data techniques (Persson and Tabellini, 2006; Papaioannou and Siourounis, 2007). However, both of these literatures leave intermediate links in the causal chain unexplored. This project seeks to fill a gap in the literature by studying the effects of political institutions on economic organization.
The intellectual merit of the project derives from its unique research design and theoretical framework. It extends the current research by studying how changes in political institutions within countries affect corporate governance and market structure using a comparative research design known as an interrupted time series with switching replications (Shadish, Cook, and Campbell, 2001). The design exploits the alternating periods of democratization among the two countries: Mexican firms serve as the "control" group during Chile's democratization, and subsequently represent the "treated" group during the late 1990's, when Chilean firms become the "control" group.
This design is particularly strong at approximating the effect of democratization on economic organization for several reasons. Most importantly, rather than studying a country-level dependent variable such as economic growth, this research employs firm and industry-level dependent variables, which enable the researcher to account for alternative explanations related to initial sectoral or technological heterogeneity. It also allows for an exploration of a potentially differential impact of political reform across different industries or sectors (as in Aghion, Alesina, and Trebbi, 2007). Furthermore, the two countries are carefully chosen to follow a most-similar case design, which attempts to hold constant as many alternative explanations as possible. Most importantly for this project, economic reforms likely to affect economic organization occurred in Chile and Mexico at nearly the same time.
This study integrates two components of economic organization that are often studied in isolation. Regarding corporate governance, my study will collect and analyze firm-level measures of ownership concentration and stock market capitalization. To measure the relationship between political institutions and economic competition, the study will collect and analyze concentration ratios, Herfindahl-Hirschman indices, and price-cost ratios. It makes sense to study corporate governance and market structure under a unified framework, since both components are governed by corporate laws and other institutions produced by national governments, which makes them subject to common pressures following political reform.
The broad impact of the study includes a contribution to two important debates. First, it improves our knowledge of the determinants of private sector development in emerging markets by drawing attention to politics. A consensus view has that "institutions matter" for economic development in general, but little is known about which specific institutions are particularly important, and channels linking them to growth. Second, this project contributes to broader debates about democracy (see, for example, Acemoglu and Robinson, 2006). For instance, evidence of changes in corporate organization following periods of democratic reform would provide strong support for the proposition that democracy reduces the economic power of special interest groups. By contrast, a null result would suggest that de jure political institutions such as democracy are insufficient for economic change due to the substantial de facto political power of entrenched elites.
