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The productivity gap between East and West Germany is a long ongoing discussion among the public and policy makers. Regional disparities still appear to be substantial. In this paper, we shed light on the role of allocative efficiency as a region’s driver of productivity disparities. We show that over 50 percent of the East-West productivity gap is associated with a less efficient labor allocation in former East Germany. Controlling for the heterogeneity among German federal states, we perform spatial regression on official firm-level data (AFiD), revealing that the regional differences in allocative efficiency are significantly associated with trade openness, competitive intensity, economies of scale and labor mobility.
Bruhn et al. (Thu,) studied this question.