What kind of shock was it? Regional Integration and Structural Change in Germany after Unification

Authors

• Burda
• M.C.

Publication Date

JEL Classification

Key Words

Eastern Germany’s recovery from the “unification shock” has been characterized by deep

structural change – with apparent repercussions for the West as well – and an integration

process involving both capital deepening (extensive and intensive investment) and labor

thinning (net out-migration). I propose a constant-returns neoclassical model of economic

integration which can account for these facts. Adjustment costs determine dynamics and

steady state regional distribution of production factors. The model also explains persistent

wage and capital rate-of-return differentials along the equilibrium path. Under competitive

conditions, observed factor price differentials contain information on those adjustment costs.