The causal effect of German reunification on economic freedom

Do large changes in electorate composition affect institutional quality? In this paper, we causally consider a unique case of a large change in electorate composition that has no ethnic component: German reunification. As East and West Germans were ethnically similar, the main difference between both groups is tied to cultural differences that arose during Communist rule. We test whether reunification lowered economic freedom (our measure of institutional quality) in Germany using synthetic control methods. We find that there was a transitory effect of less than a decade whereby reunification significantly reduced economic freedom and institutional quality.