Open It And They Will Come? The Impact of Fallen Barriers on Securities Market Participation

Abstract

Various barriers may prevent people from entering a market. Will they participate in the market despite their inexperience once the barriers fall? I exploit the socalled German reunification experiment in order to assess the impact of removed market barriers on participation rates: While East Germans were deprived of the possibility to participate in capitalist securities markets before 1989, the reunification of Germany offered access to those markets. I estimate that a person is, ceteris paribus, by 25–30 percentage points less likely to participate over a 3–7 years horizon after being initially excluded from the securities market, suggesting a prominent role of financial experience in explaining securities holdings.

Keywords: participation, liberalization, household finance, financial experience, financial literacy, stock and bond holdings, natural experiment, reunification of Germany, instrumental variables, GSOEP

JEL Classification: G02, G11, D03, D14, E03