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The Economic Impact of Social Ties: Evidence from German Reunification

67 Pages Posted: 24 Aug 2010 Last revised: 18 Aug 2012

Konrad Burchardi

London School of Economics & Political Science (LSE)

Tarek A. Hassan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: August 16, 2012

Abstract

We use the fall of the Berlin Wall in 1989 to show that personal relationships which individuals maintain for non-economic reasons can be an important determinant of regional economic growth. We show that West German 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 4.7 percentage point rise in income per capita over six years. We interpret our findings as evidence of a causal link between social ties and regional economic development.

Keywords: economic development, German reunification, networks, social ties

JEL Classification: O11, P16, N40

Suggested Citation

Burchardi, Konrad and Hassan, Tarek A., The Economic Impact of Social Ties: Evidence from German Reunification (August 16, 2012). Chicago Booth Research Paper No. 10-27; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=1664713 or http://dx.doi.org/10.2139/ssrn.1664713

Konrad Burchardi

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Tarek Alexander Hassan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/tarek.hassan/index.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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