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The rise or the fall of the wall? Determinants of low entrepreneurship in East Germany

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  • Kuehn, Zoe

    (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

Abstract

Between 1949 and 1989, communism restricted private entrepreneurship in East Germany, but even after reunification 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 reunification, in East Germany wages are fixed 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, reunification (wage setting policy, migration possibilities, and subsidies) slowed down technological growth and increased the output gap by 7 percentage points.

Suggested Citation

  • Kuehn, Zoe, 2014. "The rise or the fall of the wall? Determinants of low entrepreneurship in East Germany," Working Papers in Economic Theory 2014/03, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    • Handle: RePEc:uam:wpaper:201403
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    More about this item

    Keywords

    Entrepreneurship; Growth; Allocation of Talent; Social Mobility; Transition;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F15 - International Economics - - Trade - - - Economic Integration
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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