Economic effect of splitting a region: A case from the south of Chile

Abstract

The economic impact of territorial reforms has been discussed in the literature, but mostly looking at amalgamations rather than de-amalgamations. Little is known about the impact of territorial splits and even less in a centralized and emerging country. This paper aim to fill this gap by analyzing the specific case of the Los Rios region, who was splinted from Los Lagos region in the south of Chile. By using a synthetic control approach, a difference in differences and event studies, we estimate the causal effect of such reform over GDP, private sales, and employment on the affected regions, including the effect of the new administrative status for the city of Valdivia who became regional capital. Once we accounted for all sources of external shocks, we did not find any impact of the division on the regions of Los Lagos and Los Rios and no effect of the new administrative status for Valdivia. We believe these results are very important as illustrate that policies aimed to splits regions or relocate the capital status to promote growth should consider the context and the scope of competences of the subnational governments.