Transfers and Incentives: Some Microeconomic Consequences of German Reunification

Posted: 14 Jan 1997

See all articles by Ralph Chami

Ralph Chami

International Monetary Fund (IMF)

Jeffrey H. Fischer

U.S. Federal Trade Commission (FTC)

Date Written: September 1996

Abstract

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

Chami, Ralph and Fischer, Jeffrey H., Transfers and Incentives: Some Microeconomic Consequences of German Reunification (September 1996). Available at SSRN: https://ssrn.com/abstract=3872

Ralph Chami (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6039 (Phone)
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Jeffrey H. Fischer

U.S. Federal Trade Commission (FTC) ( email )

600 Pennsylvania Ave., NW
Washington, DC 20580
United States
202-326-2656 (Phone)
202-326-2625 (Fax)

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