The shadows of the socialist past: Lack of self-reliance hinders entrepreneurship

Abstract

We provide empirical evidence that the experience of a socialist regime leads to a lack of self-reliance by comparing East and West Germans conditional on regional differences in current economic development. This meaningful lack of self-reliance persists after the regime's breakdown and hinders the development of an entrepreneurial spirit, which might hamper the transition process. Since East Germany adopted the formal institutions of a market economy quasi overnight when reunifying with West Germany, we avoid simultaneity issues regarding current institutions and preferences. Further tentative evidence suggests that the socialist regime also affected the composition of the East German population by inducing selective migration before the construction of the Berlin Wall in 1961.