Working Paper: CEPR ID: DP8470
Authors: Konrad B. Burchardi; Tarek Hassan
Abstract: We use the fall of the Berlin Wall in 1989 to show that personal relationships whichindividuals maintain for non-economic reasons can be an important determinant of regionaleconomic growth. We show that West German households who have social ties to EastGermany in 1989 experience a persistent rise in their personal incomes after the fall ofthe 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. As a result, West German regions which (for idiosyncratic reasons) have a high concentration of households with social ties to the East exhibit substantially higher growth in income per capita in the early 1990s. A one standard deviation rise in the share of households with social ties to East Germany in 1989 is associated with a 4.7 percentage point rise in income per capita over six years. We interpret our findings as evidence of a causal link between social ties and regional economic development.
Keywords: Economic Development; German Reunification; Migration Networks; Social Ties
JEL Codes: J61; L14; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social ties formed prior to the Wall's fall (F55) | regional economic growth (R11) |
| higher concentration of households with social ties (R20) | higher growth in income per capita (O49) |
| social ties enhance entrepreneurial activity (L26) | increased returns to entrepreneurship (L26) |
| social ties enhance entrepreneurial activity (L26) | higher likelihood of firms investing in East Germany (F23) |
| households with social ties (R20) | income growth (O49) |
| social ties (Z13) | access to valuable information about local economic conditions (R53) |
| access to valuable information about local economic conditions (R53) | better investment decisions (G11) |
| better investment decisions (G11) | economic growth (O49) |