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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in ABSTRACTCommunism 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.

The Effect of Disaggregate Information on the Expectation Formation of Firms

“…D 'Acunto, Hoang, and Weber (2016) study the adjustment of consumers' inflation expectations to the German VAT shock of 2007 and the ensuing effects on the willingness to purchase durable goods. There is also an increasing number of works that examine the impact of past personal experiences on expectations (e.g., Ehrmann and Tzamourani, 2012;Malmendier and Nagel, 2016;Kuchler and Zafar, 2015) or the adjustment of consumer expectations to new information in survey experiments (e.g., Armantier, Nelson, Topa, van der Klaauw, and Zafar, 2016;Cavallo, Cruces, and Perez-Truglia, 2017;Armona, Fuster, and 4 In parallel work with the IBS data, Triebs and Tumlinson (2016) use the German reunification in 1990 as a natural experiment. They show that it took firms from the former East German states between two and five years to learn forecasting their business situation within the new capitalist environment they faced after 1990.…”

Manipulating Fiscal Forecasts: Evidence from the German States

“…Eastern firms also predict their productivity less accurately than Western firms(Triebs and Tumlinson, 2013).…”