The rise or the fall of the wall? Determinants of low entrepreneurship in East Germany
Author
Kuhn, ZoeEntity
UAM. Departamento de Análisis Económico, Teoría Económica e Historia EconómicaPublisher
UAM. Departamento de Análisis Económico, Teoría Económica e Historia EconómicaDate
2014Serie/Num.
Economic Analysis Working Paper Series. 3/2014ISSN
1885-6888Subjects
Entrepreneurship; Growth; Allocation of talent; Social mobility; Transition; EconomíaAbstract
Between 1949 and 1989, communism restricted private entrepreneurship in East
Germany, but even after reuni cation in 1990 entrepreneurship remained low compared
to other transition economies. To quantify the determinants of low entrepreneurship
in East Germany and its impact on economic outcomes, I set up
a two-region model economy with occupational and migration choices. Individuals
can become workers or entrepreneurs in East or West Germany. In line with
German policy after reuni cation, in East Germany wages are xed above labor
productivity and there are capital subsidies. Managerial knowhow is a combination
of innate talent and entrepreneurial parental background which only West Germans
possess. Technological growth increases with the innate talent of entrepreneurs.
Counter-factual experiments show that the missing tradition of entrepreneurship,
while contributing to technological growth, accounts for almost 10 percentage points
of the gap between East and West German GDP per capita. On the other hand, reuni
cation (wage setting policy, migration possibilities, and subsidies) slowed down
technological growth and increased the output gap by 7 percentage points
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