The long Shadow of Socialism: On East-West German Differences in Financial Literacy

We use the German re-unification as a natural experiment to understand drivers of financial literacy accumulation. With the transformation from a planned to a market-based economy in 1990, the incentives to invest in financial literacy were changed exogenously for East Germans and remained the same for West Germans. Our results show that even 20 years after re-unification there is evidence for a significant financial literacy gap between East and West. While some groups, for instance women and those who have migrated from the East to the West, have mastered to catch up with their West German peers, others did not. Differences in financial literacy are present across all educational groups and at the top as well as the bottom of the income distribution. Based on models which account for factors that are commonly integrated in financial literacy theory, we decompose the financial literacy gap. Most of the gap remains unexplained. Thus, an extension of empirical and theoretical models that allow for the inclusion of differences in attitudes and values might be crucial to improve our understanding of financial literacy acquisition.