Take the Money and Run? Privatizations and Rent Extraction

This paper studies state-owned firms that were privatized by the Pinochet dictatorship in Chile at significantly lower than market prices. These corrupt privatizations effectively transferred wealth from the State to a handful of politically connected individuals. We find that, when compared to similar firms privatized using non-corrupt processes, these corrupt firms obtained more loans at lower interest rates from state-owned banks in dictatorship and became larger in the last years of the regime. After Chile’s return to democracy, the ownership of these firms evolves pyramidally and their performance drops, facts consistent with tunneling. We also observe that these corrupt firms acquired political connections and illegally financed political campaigns. Overall, results suggest that politically powerful individuals can transfer wealth from the State to their networks with significant economic and political consequences in the short- and long-run.