The Treuhand Privatizations: Buyer Selection, Regional Consequences, and Political Scarring Effects

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After the fall of the Berlin Wall, East Germany experienced what was arguably history's most extensive privatization program. The German government instated a public agency, the Treuhandanstalt (short: Treuhand), to divest the entire state-owned economy of the former German Democratic Republic (GDR). All firms were privatized or liquidated within less than five years. The current state of economic research is disproportionate to the topic’s historical and political significance. Studies of East German privatizations are strikingly rare, likely due to data gaps. The aim of the proposed research project is to investigate the process and consequences of the Treuhand privatizations. Internationally, the project contributes to a broader literature on privatization processes and privatization consequences. The overarching goal subsumes three independent research modules, each involving the construction of new datasets and empirical designs. All modules extend the preliminary work of the applicant that has generated a unique dataset of Treuhand firms, comprising administrative firm registers, archival sources, and firm surveys. The first module examines how the Treuhand decided which prospective buyers were successful in acquiring the companies. The recent opening of the Treuhand files allows exploiting a globally unique setting where winning and defeated bids were documented alongside. By assessing which bid components are most predictive for successful bids, these results further resonate with research on public procurement. The analysis also explores why most Treuhand firms were sold to West German buyers. In the second module, the project investigates the regional consequences of the Treuhand’s decisions. It thereby expands the literature on regional firm spillovers towards the privatization debate. The Treuhand setting provides a rich setting as the number of privatization and liquidation cases was extremely large and plausibly exogenous variation in privatization rates is available. There are many parallels to current policies on regional development as privatizations took place within Western institutions and partially existing market environments.Third, the project strives to establish the consequences of privatization decisions for political attitudes. Literature has established that voters’ preferences for privatization depend on their experiences with such programs. However, it remains unknown whether experiences also alter voting behaviors and democratic attitudes more generally. As research documents long-lasting political effects of increasing import competition, privatization decisions may leave similar “scarring effects”. Privatizations are often associated with job losses, which may lead to outmigration and demographic shifts in the remaining population. These longer-term consequences may help explain the rise of populist movements in East Germany.