Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/276236 
Year of Publication: 
2023
Series/Report no.: 
IWH Discussion Papers No. 17/2023
Publisher: 
Halle Institute for Economic Research (IWH), Halle (Saale)
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.
Subjects: 
industrial policy
privatizations
productivity
size-dependent regulations
JEL: 
D22
D24
J08
L25
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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