Learning Capitalism the Hard Way--Evidence from German Reunification

42 Pages Posted: 12 Jul 2013 Last revised: 17 Jul 2013

See all articles by Thomas Triebs

Thomas Triebs

Loughborough University - School of Business and Economics

Justin Tumlinson

Loughborough University; Ludwig Maximilian University of Munich (LMU)

Date Written: July 2013

Abstract

We develop a model of firm learning in volatile markets with noisy signals and test its predictions using historical data from the Ifo Institute's Business Climate Survey. We find that firms' forecasts improve as they age. We also exploit German Reunification as a natural experiment where firms in the East are treated with ignorance about the distribution of market states. As theoretically predicted, Eastern firms make larger forecast errors than Western ones, but this gap gradually closes over the decade following Reunification. The slow convergence rate stems from differences in expectations rather than market conditions. We also find evidence for the model's predictions that improvements from learning are faster where market signals are noisier.

Suggested Citation

Triebs, Thomas and Tumlinson, Justin, Learning Capitalism the Hard Way--Evidence from German Reunification (July 2013). NBER Working Paper No. w19209, Available at SSRN: https://ssrn.com/abstract=2292830

Thomas Triebs (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Justin Tumlinson

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain
+44 (0) 2038051339 (Phone)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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