Land Inequality, Asset Portfolio Diversification, and Public Goods Provision

• In Event: Democracy and Revolution in Historical Perspective

Abstract

Most of the literature that seeks to explain the historical origins of development has focused on factor endowments and the legacy of colonial institutions. In this paper, I provide an alternative explanation: I argue that the transformation of economic elites' asset portfolios, during the transition out from pre-industrialism, when new investment opportunities emerged, helps explain why some places experienced more development than others both in the short- and the long run, and why some were able to revert their fortunes while others did not. Specifically, I argue that where the landed elite perceived a higher risk of expropriation, it diversified its holding portfolio into other sectors of the economy (finance and manufacturing) to hedge such risk. Furthermore, elites' asset portfolio diversification strategy had two immediate consequences. First, diversification of economic interests produced incentives for ex-ante landed elites to seek positions in government at the national level from where they could shape policies that favored their broader interest in policies with a multiplier effect across sectors of the economy. Second, the interest of diversified elites in this type of policies, in turn, mirrored in higher investments on public goods for their districts. I test my argument by exploiting variation at the individual and subnational levels in Chile around the time when the first corporate law that regulated joint-stock companies was approved in 1850. Using original micro-level data from previously untapped archives that allows me to identify landholdings and participation in joint-stock companies of 55,504 elite members between the mid-nineteenth century and the first decade of the twentieth century, I show that landed elites diversified more in districts with higher land inequality; that those who diversified looked for positions at the national government leaving aside local level politics; and that districts where local elites diversified more experienced higher rates of public goods provision both in the short and long-term. These results provide novel evidence on that initial high levels of land inequality can lead to prosperity.

Author

• Victoria Paniagua, European University Institute