Technology Gaps, Competition, and Regional Convergence

Even 30 years after reunification, regions in East Germany face considerably different economic conditions, with average GDP per capita still about 20 percent below West German levels. The Project, presented in this Mannheim Applied Seminar, explores factors that impeded convergence despite massive support to the East, focusing on technological differences and firm behavior. 
In the immediate aftermath of reunification, per-capita output in the former GDR exhibited rapid catch-up with notable labor productivity gains. However, convergence quickly tapered off, and a stark difference in product qualities between East and West German firms has persisted ever since.
A new quantitative model of innovation, competition, and regional integration—designed to mimic these dynamics—provides a framework to evaluate alternative policies. Initial findings suggest that large technological gaps depressed Eastern firms' incentives to compete and invest, perpetuating disparities. Delaying reunification would not have helped build capacity in the East. Sustained R&D support from West to East could have reduced gaps, but even more welfare-improving options exist: e.g., subsidizing Western firms' R&D with knowledge spillovers to the East, or facilitating technology transfer via licensing.