The Economic Impact of Social Ties: Evidence from German Reunification

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

See all articles by Konrad Burchardi

Konrad Burchardi

London School of Economics & Political Science (LSE)

Tarek A. Hassan

Boston University; 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 Alexander, 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)

Boston University ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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