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Learning Capitalism the Hard Way—Evidence from Germany's Reunification

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  • Thomas P. Triebs
  • Justin Tumlinson

Abstract

Communism in East Germany sought to dampen the effect of market forces on firm productivity for nearly 40 years. How did East German firms respond to the free market after being thrust into it in 1990? We use a formal learning model and German business survey data to analyze the lasting impact of this far-reaching treatment on the way firms in former East Germany predicted their own productivity relative to firms in former West Germany during the two decades since Reunification. We find in confirmation of our formal model's predictions, that Eastern firms forecast productivity less accurately, particularly in dynamic and uncertain markets, but that the gap gradually closed over 12 to 13 years. Second, by analyzing the direction of firm level errors in conjunction with contemporaneous market signals we find that, in the years immediately following Reunification, Eastern firms estimate the market's role as generally less potent than Western firm do, an observation consistent with overweighting experiences from the communist era; however, over roughly 14 years both converge to the same (incorrect) overestimate of the market's role on their productivity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19209.

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Date of creation: Jul 2013
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Handle: RePEc:nbr:nberwo:19209

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  1. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, INFORMS, vol. 39(1), pages 17-31, January.
  2. Bauernschuster, Stefan & Falck, Oliver & Gold, Robert & Heblich, Stephan, 2012. "The shadows of the socialist past: Lack of self-reliance hinders entrepreneurship," European Journal of Political Economy, Elsevier, vol. 28(4), pages 485-497.
  3. van Hoorn, André & Maseland, Robbert, 2010. "Cultural differences between East and West Germany after 1991: Communist values versus economic performance?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(3), pages 791-804, December.
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