Learning Capitalism the Hard Way - Evidence from German Reunification

42 Pages Posted: 1 Feb 2017

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)

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Date Written: December 2016

Abstract

We develop a model of firm learning in volatile markets with noisy signals and test its predictions using historical German data. Firms’ forecasts improve with age. We 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 forecast worse than Western ones, but this gap gradually closes over the decade following Reunification. The slow convergence stems from differences in expectations rather than market conditions. We find evidence for the model’s predictions that improvements from learning are faster where market signals are noisier.

Keywords: expectation formation, learning, business cycle forecasting, transition dynamics

Suggested Citation

Triebs, Thomas and Tumlinson, Justin, Learning Capitalism the Hard Way - Evidence from German Reunification (December 2016). CESifo Working Paper Series No. 6260, Available at SSRN: https://ssrn.com/abstract=2909646

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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