Essays on Firm Ownership, Political Preferences and Welfare

Does firm ownership matter for people's political preferences and their welfare? This thesis sheds light on this question by revisiting one of the largest reorganizations of ultimate company ownership in recent history – East Germany’s mass privatization program following the fall of the wall and the German reunification. The program sold, communalized, restituted or liquidated almost the entirety of East Germany's former communist firms in 5 years. In the first chapter of this thesis, in a joint work with Moritz Lubczyk and Lukas Mergele, we build a comprehensive dataset from digitized and electronic firm records with the aim of examining the privatization program’s objective to privatize economically viable communist firms. We document that firms with higher baseline productivity are more likely to be privatized, yield higher sales prices, are more often acquired by West Germans, and are more likely to survive 20 years later. These stylized facts can be interpreted such that the privatization agency did not grossly violate its mandate. We do not answer the question whether the mandate was the right one. The fall of the Berlin Wall in 1989 brought the end of socialism, yet pro-socialist sentiment regained momentum surprisingly quickly across Eastern Europe. The second chapter written with Anselm Hager, Werner Krause and Lukas Mergele, poses the question why voters moved back to an ideology that was associated with rigged elections and lackluster economic performance? This paper points to the rushed privatization of East European economies as one plausible driver of the revival of socialist voting. Using micro-level data from East Germany, we show that firm privatizations led to a marked resurgence of the former Socialist Unity Party. We argue that this effect is likely due to perceived injustice: Socialist voting thrived whenever firms were sold to Western elites, which East Germans took as a sign that capitalism was not meritocratic. In the third chapter, I study the effects of restructuring of communist firms on the welfare of workers. Event studies of privatization at the level of firms demonstrate that privatized firms reduce employment and experience a decline in revenue compared to firms that remain state-owned. I use a bargaining model of workers and firms to explain these findings, assuming that state-owned firms facing uncertain shocks to profits are less risk averse than private owners. Linking privatizations to labor markets at the district-industry level, I find that privatizations had adverse effects on employment, income and life satisfaction.