History

The Economic Impact of Social Ties: Evidence from German Reunification

Konrad Burchardi, Tarek A. Hassan

We show that West German households who have social ties to East Germany in 1989 experience a persistent rise in their personal incomes after the fall of the Berlin Wall. Moreover, the presence of these households significantly affects economic performance at the regional level: it increases the returns to entrepreneurial activity, the share of households who become entrepreneurs, and the likelihood that firms based within a given West German region invest in East Germany.

Variation in wartime destruction thus made it more difficult to settle in some parts of West Germany than in others at the time when millions of migrants arrived from the East. We argue that the extent of destruction in 1946 provides the exogenous source of variation in the regional distribution of social ties which we need in order to identify a causal effect of social ties on regional economic outcomes post 1989.