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Transfers and transition: The impact of government support on factor demand and production in Eastern Germany

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  • Gerling, Katja
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    Abstract

    The paper presents an error-correction model of factor demand and output, analysing the effects of a change in relative factor prices on investment, employment and output in the eastern German manufacturing sector. The principal aim is twofold: first, to examine if the large amounts of capital subsidization mainly benefitted the capital-intensive industries, thus leading to distortions in the production structure, and second, to find out if the subsidies proved to be successful in creating employment in the eastern German industries or if they rather contributed to a substitution of capital for labour and skilled labour. The model uses the concept of the user cost of capital for a representation of capital costs, integrating the main instruments of subsidization. The results confirm that all in all, capital subsidies seem to encourage capital-intensive production structures. As to employment, the positive output effect might overcompensate the substitution effect only for skilled, but not for unskilled labour and only in the capital- and surprisingly also in the labour-intensive industries. For the skilledlabour- intensive industries, the outcome is much less encouraging.

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 878.

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    Date of creation: 1998
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    Handle: RePEc:kie:kieliw:878

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    1. Jeroen J.M. Kremers & Neil R. Ericsson & Juan J. Dolado, 1992. "The power of cointegration tests," International Finance Discussion Papers 431, Board of Governors of the Federal Reserve System (U.S.).
    2. Brauer, Holger & Falk, Martin & Raiser, Martin, 1996. "Labour markets in Poland and Hungary five years from the start of transition: Evidence from monthly data," Kiel Working Papers 742, Kiel Institute for the World Economy.
    3. King, M. A., 1972. "Taxation and investment incentives in a vintage investment model," Journal of Public Economics, Elsevier, vol. 1(1), pages 121-147, April.
    4. Faini, Riccardo & Schiantarelli, Fabio, 1985. "Oligopolistic models of investment and employment decisions in a regional context: Theory and empirical evidence from a putty-clay model," European Economic Review, Elsevier, vol. 27(2), pages 221-242, March.
    5. Gerling, Katja & Schmidt,Klaus-Dieter, 1997. "On the competitive position of Eastern German manufacturing: Why is catching-up so slow?," Kiel Working Papers 825, Kiel Institute for the World Economy.
    6. M. Ishaq Nadiri, 1972. "An Alternative Model of Business Investment Spending," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(3), pages 547-584.
    7. Hughes Hallett, A. & Ma, Y. & Melitz, J., 1996. "Unification and the policy predicament in Germany," Economic Modelling, Elsevier, vol. 13(4), pages 519-544, October.
    8. Begg, David & Portes, Richard, 1992. "Eastern Germany Since Unification: Wage Subsidies Remain a Better Way," CEPR Discussion Papers 730, C.E.P.R. Discussion Papers.
    9. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December.
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    Cited by:
    1. Boss, Alfred & Gerling, Katja & Gottschalk, Jan & Kamps, Christophe & Meier, Carsten-Patrick & Scheide, Joachim & Schmidt, Rainer & Strauß, Hubert, 1999. "Deutsche Konjunktur zieht wieder an," Open Access Publications from Kiel Institute for the World Economy 2318, Kiel Institute for the World Economy (IfW).
    2. Katja Gerling, 2000. "Subsidization and Structural Change in Eastern German Transition: Did Economic Policy Meet Its Objectives?," Kiel Working Papers 998, Kiel Institute for the World Economy.
    3. Henning Klodt, 2000. "Industrial Policy and the East German Productivity Puzzle," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 315-333, 08.

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