Committing to Grow: Privatizations and Firm Dynamics in East Germany

Ufuk Akcigit, Harun Alp, André Diegmann (geb. Nolte) and Nicolas Serrano-Velarde

No 685, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We study the implications of employment targets on firm dynamics during the privatization of the East German economy. Exploiting novel contract-level data, we document three stylized facts. First, the policy distorted firm size choices and generated bunching of firms around their committed employment target. Second, exploiting heterogeneous labor preferences of privatizers, we how that assigning tight commitments to firms causes an increase in employment growth and leads to higher productivity growth. Finally, tighter commitments also result in significant costs by leading to increased firm exit. We interpret these results through the lens of a dynamic model with endogenous productivity growth at the firm level. The model highlights that while tight commitments distort the employment decision statically and lead to a higher exit probability, they also induce a “catch-up” increase in productivity growth. This is because although firm profits are lower under tight commitments, marginal profits with respect to productivity are higher. We calibrate the model to our data and find that the policy lead to a 3 percentage points higher aggregate TFP growth thanks to the productivity improvements of firms with tight contracts.

Date: 2023
New Economics Papers: this item is included in nep-bec, nep-ent, nep-lab, nep-sbm and nep-tid
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https://repec.unibocconi.it/igier/igi/wp/2023/685.pdf (application/pdf)

Related works:
Working Paper: Committing to Grow: Privatizations and Firm Dynamics in East Germany (2024)
Working Paper: Committing to Grow: Privatizations and Firm Dynamics in East Germany (2023)
Working Paper: Committing to Grow: Privatizations and Firm Dynamics in East Germany (2023)
Working Paper: Committing to Grow: Privatizations and Firm Dynamics in East Germany (2023)
Working Paper: Committing to Grow: Privatizations and Firm Dynamics in East Germany (2023)
Working Paper: Committing to grow: Privatizations and firm dynamics in East Germany (2023)
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