Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/318511 
Year of Publication: 
2025
Series/Report no.: 
Volkswirtschaftliche Diskussionsreihe No. 348
Publisher: 
Universität Augsburg, Institut für Volkswirtschaftslehre, Augsburg
Abstract: 
German reunification in 1990 marked the first sudden integration of a socialist and capitalist economy. Despite East Germany's (EG) economic catch-up with West Ger- many (WG), the integration remains unfinished, as indicated by per capita output in EG still being about one-third lower. To study this unfinished regional convergence, we apply wedge-growth accounting using a human capital-augmented, two-sector, two-region model, incorporating labor supply constraints to capture key qualitative differences between EG and WG. Our findings show that sectoral labor and capital wedges are similar within regions and have significantly converged between regions, with EG initially overusing inputs. While productivity in the nontradable goods sector has fully converged, the tradable sector in EG remains less productive than in WG. Counterfactual analysis suggests that this productivity gap, together with persistent net inflows to EG, explains EG's lower economic activity. However, reducing the in- flows would result in significant welfare losses in EG. Furthermore, we account for the reunification event, identifying a substantial productivity catch-up in EG between 1989 and 1991. Our findings offer clear policy insights, highlighting the trade-offs between economic activity and fiscal transfers.
Subjects: 
German reunification
Regional convergence
Wedge-growth accounting
Comparative inefficiencies
JEL: 
E13
E24
N14
O11
O47
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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