Working Paper: CEPR ID: DP18431
Authors: Ufuk Akcigit; Harun Alp; Andre Diegmann; Nicolas Serranovelarde
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.
Keywords: industrial policy; privatizations; productivity; size-dependent regulations
JEL Codes: D22; D24; J08; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| binding labor commitments (J52) | annual employment growth rate (J39) |
| binding labor commitments (J52) | annual productivity growth (O49) |
| binding labor commitments (J52) | probability of exit (C41) |
| binding labor commitments (J52) | aggregate employment in the sector (E23) |