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Committing to Grow: Privatizations and Firm Dynamics in East Germany

Author

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  • Akcigit, Ufuk
  • Alp, Harun
  • Diegmann, Andre
  • Serrano-Velarde, Nicolas

Abstract

This paper investigates a unique policy designed to maintain employment during the privatization of East German firms after the fall of the Iron Curtain. The policy required new owners of the firms to commit to employment targets, with penalties for non-compliance. Using a dynamic model, we highlight three channels through which employment targets impact firms: distorted employment decisions, increased productivity, and higher exit rates. Our empirical analysis, using a novel dataset and instrumental variable approach, confirms these findings. We estimate a 22% points higher annual employment growth rate, a 14% points higher annual productivity growth, and a 3.6% points higher probability of exit for firms with binding employment targets. Our calibrated model further demonstrates that without these targets, aggregate employment would have been 15% lower after 10 years. Additionally, an alternative policy of productivity investment subsidies proved costly and less effective in the short term.

Suggested Citation

  • Akcigit, Ufuk & Alp, Harun & Diegmann, Andre & Serrano-Velarde, Nicolas, 2023. "Committing to Grow: Privatizations and Firm Dynamics in East Germany," CEPR Discussion Papers 18431, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18431
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    Cited by:

    1. is not listed on IDEAS
    2. Ufuk Akcigit & Furkan Kilic & Somik Lall & Solomiya Shpak, 2025. "Engineering Ukraine's Wirtschaftswunder," NBER Working Papers 34103, National Bureau of Economic Research, Inc.
    3. Sam Desiere & Tiziano Toniolo & Gert Bijnens, 2025. "Too much of a good thing? The macro implications of massive firm entry," LIDAM Discussion Papers IRES 2025005, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    4. Mergele, Lukas & Hennicke, Moritz & Lubczyk, Moritz, 2025. "The big sell: Privatizing East Germany’s economy," Journal of Public Economics, Elsevier, vol. 242(C).

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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