Business Cycle and Political Election Outcomes: New Evidence from The Chilean Democracy

This paper explores the influence of economic variables in Chilean presidential elections. We use a panel where the dependent variable corresponds to the share of the vote obtained by the incumbent at a municipal level in the presidential elections of 1989, 1993 and 1999. We focus on the unemployment rate and the output-gap and find that both have a significant influence on the vote. The estimations also indicate that variables such as the crime rate, the poverty rate and the political coalition of the mayor in each municipality have an influence on the vote.Political elections, business cycle, unemployment

Taxation and Private Investment: Evidence for Chile

Along with several structural reforms, Chile embarked upon a major income tax reform in the eighties. Its basic feature was a significant reduction in the corporate income tax rate. The purpose of this paper is to investigate empirically the link between the tax reform and the investment performance of Chile since the reform. Macroeconomic and microeconomic evidence is found to be consistent with the hypothesis of the reduction in the corporate income tax as being one of the determinants of the investment boom of the late eighties and nineties in Chile. Macro data for the period 1975-2003 are used and the evidence indicates that the tax reform explains an increase in private investment of three percentage points of the GDP. On the other hand, information on 87 publicly held companies is used to construct a panel for the period 1980-2002. The microeconomic evidence confirms that investment was positively affected by the tax reform.Private investmen, corporate income tax, user’s cost of capital

Crime Prevention Programs: Evidence for a Developing Country

This paper analyzes the impact of two anti-crime programs implemented in Chile in the late 1990s. The first (Quadrant Plan) is related to enhancing the quality of police work and the second one (Secure County Plan) to the involvement of the community in designing specific projects aimed at reducing the crime rate. It is found that only the Quadrant Plan has been successful in terms of reducing crime rates and has caused its impact through the effect of arrests in deterring crime. The Secure County program does not appear to have any impact on crime rates. It is also found that crime is associated with unemployment and that there is persistence in crime rates.Crime, anti-crime programs, GMM

Government Subsidies and Political Elections: Evidence for Chile

In this paper, we explore the effects of government subsidies (monetary and in-kind) in presidential elections in Chile in 1989-2000. Our dependent variable is the percentage of votes obtained by the incumbent. We use a panel with three periods (the elections of 1989, 1993 and 1999) and 228 counties. We correct for the potential simultaneity problem derived from the fact that an incumbent facing a difficult political scenario might react by increasing subsidies to improve his/her electoral performance. Our results indicate that the greater the government spending on these types of programs (measured by the percentage of the population that receives the subsidy), the higher the votes for the incumbent. When we separate monetary and in-kind subsidies, we find that only inkind subsidies are statistically significant. We estimate that to obtain an additional vote, the incumbent has to spend between US$1,680 and US$1,920 (measured in PPP) in government subsidies.Political elections, subsidies, business cycle, unemployment

Unemployment Insurance in Chile: Does it Stabilize the Business Cycle?

We explore the stabilizing effects of unemployment insurance in Chile. A dynamic general equilibrium model is calibrated for the Chilean economy for the 1960-2000 period. We assume that the economy is subject to exogenous technological shocks and that a fraction of the population is liquidity constrained. Our main conclusion is that unemployment insurance has some stabilizing effect on the business cycle, especially on consumption, but that this effect is of the second order of magnitude. We also find that the larger the fraction of the population that is liquidity constrained, the more likely the program is welfare improving. Our results suggest that the objective of stabilizing the business cycle would be more efficiently achieved using alternative instruments.Unemployment insurance, business cycle

Is Ownership Structure a Determinant of Bank Efficiency?

When owners could easily sell a company if it is not performing well enough provide additional incentive to the administration to act in the best interest of the stockholders, since in the merger process the actual administration will lose their job (Jensen and Ruback, 1983; Schranz, 1993). It is difficult to test this hypothesis empirically due to the difficulty in measuring some of these concepts. This paper uses cost and profit functions to estimate efficiency at the bank level in Chile. Based on these measures, we explain cross-bank differences over time, which are related to bank size, ownership structure, and other relevant variables. We report two main findings. First, banks that are established as listed companies in Chile tend to show a higher level of efficiency than those established as closed companies. This result holds even after controlling for the bank’s product mix and property origin (domestic versus foreign). Our interpretation of this result is that listed banks have a relatively high probability of takeover in Chile, since the ownership structure is known. Managers therefore act in the best interest of stockholders. Second, banks that have a high property concentration demonstrate a high level of efficiency. The two results together suggest that mitigation of the principal-agent problem is key to explaining bank efficiency.

Do Large Retailers Affect Employment? Evidence from an Emerging Economy

This paper studies the effect of the emergence of large retailers (hypermarkets and department stores) on employment in the commerce sector in the regions of Chile. We use a panel with quarterly data from eleven Chilean regions for the period 1996-2004. Our results indicate that the entry of large retailers produces a discrete increase in employment in the commerce sector in the quarter that the entry occurs. We also find that there is an additional positive effect on employment throughout the year entry occurs, suggesting that suppliers or other parts of the chain of production follow the large retailer into the local market. However, after the first year of the entry there is a partial reversion, suggesting that smaller retailers exit or contract in response to the entry of the large retailer. The net effect on employment of the entry of a large retailer is an increase of 300 jobs.Entry, employment, retail

Debt Valuation Effects when there is Foreign Currency-Denominated Debt

This paper discusses the way in which the existence of debt denominated in both domestic and foreign currency affects debt-sustainability analyses. Ignoring valuation issues can lead to misleading conclusions regarding fiscal sustainability. We show that a devaluation of the domestic currency can significantly change the path of a sustainable fiscal policy. In our model, the adjustment not only comes through the change in the value of the foreign currency-denominated public debt, but also though the effects on the interest rate and growth. We find that the required fiscal adjustment to achieve fiscal sustainability after a devaluation increases with the size of the devaluation, the length of the adjustment period, the effect on interest rates and growth, and the share of public debt that is denominated in foreign currency.Public debt, valuation effects, debt management

Entry and Prices: Evidence from the Chilean Supermarket Industry

One of the most significant developments in the last couple of decades in the retail industry has been the emergence of large supermarkets (hypermarkets). The purpose of this paper is to investigate the effect on prices of the entry of a large supermarket into a given location. We use a panel with data from fifteen cities in Chile for the period 1998:I – 2004:IV. The dependent variable is the price of a bundle of 52 food products in each city relative to Santiago. We find that the entry of a hypermarket to a given city reduces prices in that local market by ten percent. Most interestingly, we also find that half of this effect takes place the year before the supermarket actually opens for business.Entry, prices, retail