Transfers and Incentives: Some Microeconomic Consequences of German Reunification
Posted: 14 Jan 1997
Date Written: September 1996
The German Monetary Union of 1990 resulted in government income-transfer policies that had two opposing effects on the work incentives of East Germans. We model the outcome of the political process as one in which the government is concerned with both income growth and current levels of consumption in East Germany. When the German government can commit itself to a transfer policy, we find that the presence of a paternalistic government (1992, 1993) is welfare-enhancing. However, balancing equity with efficiency may not be time-consistent. We examine time-consistent transfer policies and show that the combination of incentives may cause labor productivity to fall in response to government transfers.
JEL Classification: D64, D82, H5
Suggested Citation: Suggested Citation