Burchardi, K., Hassan, T. (2011). The Economic Impact of Social Ties: Evidence from German Reunification. CEPR Discussion Paper DP8470

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We use the fall of the Berlin Wall in 1989 to identify a causal effect of social ties on regional economic growth. We show that households who have social ties to East Germany in 1989 experience a persistent rise in their personal incomes after the fall of the Berlin Wall. Moreover, the presence of these households significantly affects economic performance at the regional level: it increases the returns to entrepreneurial activity, the share of households who become entrepreneurs, and the likelihood that firms based within a given West German region invest in East Germany. As a result, West German regions which (for idiosyncratic reasons) have a high concentration of households with social ties to the East exhibit substantially higher growth in income per capita in the early 1990s. A one standard deviation rise in the share of households with social ties to East Germany in 1989 is associated with a 4.6 percentage point rise in income per capita over six years. We interpret our findings as evidence that social ties between individuals can indeed facilitate economic growth.

Authors

Burchardi, Konrad B.

I am a PhD candidate at the London School of Economics. In September I will take up a position as assistant professor at IIES, Stockholm. My research seeks to combine microeconomic theory and microeconometrical or experimental testing to gain insights about individual behavior and market...