Brothers from Another Mother? The Causal Effect of German Reunification on Economic Freedom

Abstract

Are large changes in electorate composition associated with changes in institutions? Such changes often occur because of immigration and its effect on ethnic fractionalization. In this paper, we consider a unique case of a large change in electorate composition that has no ethnic component: German reunification. As East and West Germans were ethnically similar, the main difference between both group is tied to cultural differences that arose during Communist rule. We test whether reunification lowered economic freedom in Germany using synthetic control methods. We find that there was a transitory effect of less than a decade whereby reunification significantly reduced economic freedom.

JEL Classification: E02, F02, N40