Migration, wages, and parental background: Obstacles to entrepreneurship and growth in East Germany

Zoë Kuehn ()
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Zoë Kuehn: Universidad Carlos III de Madrid

No 2010-08, Working Papers from Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales

Abstract: For the last decade, the East German economy has been suffering from high unemployment and low economic growth. Policy makers often point to the lack of entrepreneurship as one of East Germany's main problems. This paper addresses the question of how East Germany's integration into an established economy, West Germany, may have hindered a fruitful development of entrepreneurship and how this may have affected economic growth. I build a model economy that places Lucas's (1978) span-of-control model into an overlapping-generations framework. Following Hassler and Rodríguez Mora (2000) managerial knowhow is defined as a combination of two factors, innate talent and entrepreneurial parental background, and growth depends on the innate talent of entrepreneurs. In East Germany, the lack of entrepreneurial parental background makes talent the decisive factor in occupational choice and more talented entrepreneurs should contribute to high growth rates. However, three key aspects of its integration into West Germany inhibit this mechanism: 1) the unrestricted mobility of East Germans to the West, 2) the policy of fixing East German wages as fractions of West German wages, and 3) the importance of parental background for entrepreneurship in West Germany. Counterfactual experiments show that eliminating any of these three aspects leads to more entrepreneurs, less unemployment, and higher economic growth in East Germany.

Keywords: entrepreneurship; allocation of talent; social mobility; transition (search for similar items in EconPapers)
JEL-codes: E24 F15 J22 (search for similar items in EconPapers)
Date: 2010-05-12, Revised 2011-09-01
New Economics Papers: this item is included in nep-ent, nep-hrm, nep-mig and nep-tra
Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the Bank of Spain Excellence Programme
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