Working Paper: NBER ID: w26818
Authors: Christine Laudenbach; Ulrike Malmendier; Alexandra Niessen-Ruenzi
Abstract: We analyze the long-term effects of living under communism and its anticapitalist doctrine on households’ financial investment decisions and attitudes towards financial markets. Utilizing comprehensive German brokerage data and bank data, we show that, decades after Reunification, East Germans still invest significantly less in the stock market than West Germans. Consistent with communist friends-and-foes propaganda, East Germans are more likely to hold stocks of companies from communist countries (China, Russia, Vietnam) and of state-owned companies, and are unlikely to invest in American companies and the financial industry. Effects are stronger for individuals exposed to positive “emotional tagging,” e.g., those living in celebrated showcase cities. Effects reverse for individuals with negative experiences, e.g., environmental pollution, religious oppression, or lack of (Western) TV entertainment. Election years trigger further divergence of East and West Germans. We provide evidence of negative welfare consequences due to less diversified portfolios, higher-fee products, and lower risk-adjusted returns.
Keywords: Communism; Financial Markets; Investment Decisions; East Germany; Emotional Tagging
JEL Codes: D03; D14; D83; D84; E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Historical exposure to communist ideology (P30) | Lower willingness to invest in the stock market (G19) |
| Negative experiences under communism (P39) | Greater reluctance to invest (G31) |
| Positive experiences (I31) | Stronger aversion to capital markets (G19) |
| Emotional experiences under communism (P39) | Investment behavior (G11) |
| Individual characteristics, local economic conditions, and prior experiences under communism (P36) | Investment behavior (G11) |