Working Paper: NBER ID: w31645
Authors: Ufuk Akcigit; Harun Alp; Andr Diegmann; Nicolas Serrano-Velarde
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: employment targets; privatization; firm dynamics; East Germany; productivity
JEL Codes: D22; D24; J08; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| binding employment targets (J23) | annual employment growth rate (J39) |
| binding employment targets (J23) | annual productivity growth rate (O49) |
| binding employment targets (J23) | probability of exit (C41) |