Working Paper: NBER ID: w17186
Authors: Konrad B. Burchardi; Tarek Alexander Hassan
Abstract: We use the fall of the Berlin Wall in 1989 to show that personal relationships which individuals maintain for non-economic reasons can be an important determinant of regional economic growth. 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. 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 4.6 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: social ties; economic growth; German reunification; entrepreneurial activity
JEL Codes: L14; O1; O11; O43; O52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social ties between West German households and East Germany (F55) | Increase in personal income post-reunification (N14) |
| Wartime destruction (N44) | Social ties between West and East Germans (F55) |
| Social ties between West German households and East Germany (F55) | Regional economic performance (R11) |
| Households with ties to East Germany (R20) | Income growth (O49) |