Economic Systems and Risk Preferences: Evidence from East and West Germany

Abstract

For standard economic models it is typically assumed that preferences are given and stable. But do economic systems shape individuals' risk preferences? Using the reunification of East and West Germany as a natural experiment I evaluate differences in financial risk taking comparing Eastern and Western German households after the fall of the Berlin Wall. Controlling for a large set of socio-economic variables East Germans having been "treated" by a command economy were more prone to taking financial risk than West German citizens. The differences were quantitatively relevant after the fall of the Iron Curtain and almost vanished by 2008.

Keywords: economic systems, endogenous risk preferences, Germany, re-unification

JEL Classification: D03, D14, G11, P50