Nicola Fuchs-Schündeln

Precautionary Savings and Self-Selection: Evidence from the German Reunification “Experiment”

We combine particular features of the German civil service with the unique event of German reunification to test the theory of precautionary savings and to quantify the importance of self-selection into occupations due to differences in risk aversion. In the presence of self-selection, failing to control for risk aversion in empirical tests of precautionary savings results in a bias that could lead to a false rejection of the theory. We exploit the fact that for individuals from the former German Democratic Republic (GDR) German reunification in 1990 caused an exogenous reassignment of income risks. Our findings suggest that self-selection of risk averse individuals into low-risk occupations is economically important and decreases aggregate precautionary wealth holdings significantly.

Inequality Trends for Germany in the Last Two Decades: A Tale of Two Countries

In this paper we first document inequality trends in wages, hours worked, earnings, consumption, and wealth for Germany from the last twenty years. We generally find that inequality was relatively stable in West Germany until the German reunification, and then trended upwards for wages and market incomes, especially after about 1998. Disposable income and consumption, on the other hand, display only a modest increase in inequality over the same period. These trends occurred against the backdrop of lower trend growth of earnings, incomes and consumption in the 1990s relative to the 1980s. In the second part of the paper we further analyze the differences between East and West Germans in terms of the evolution of levels and inequality of wages, income, and consumption.

The Response of Household Saving to the Large Shock of German Reunification

German reunification was a large, unexpected shock for East Germans, with different economic consequences for different birth cohorts. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. In the empirical part, I derive three stylized features concerning the saving behavior of East vs. West Germans in the 1990s: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this East-West gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time. The theoretical part investigates whether a comprehensive life cycle model can predict these three features. I find strong evidence in favor of rational, forward looking saving behavior. The precautionary saving motive is essential in replicating the features from the data.

Stock Market Liberalizations: Financial and Macroeconomic Implications

Using a panel of 27 countries, we analyze the effects of stock market liberalization on financial and macroeconomic development. We find that liberalization is associated with a short-term increase in real private investment growth of about 14 percentage points cumulatively in the four years following liberalization and a cumulative 4 percentage point increase in real GDP per capita growth. Growth tends to be higher if institutional reforms precede liberalization. In contrast to other studies, we also find evidence for a permanent growth effect of about 0.4 percent a year in an extended sample of 72 countries.

On the endogeneity of political preferences: Evidence from individual experience with democracy

Political preferences provide economic capital Longer periods of democratic government favor economic growth, which in turn stabilizes democracy. But is this relationship a given? Fuchs-Schundeln and Schundeln collected individual-level data from more than 100 countries over two decades. Support for democracy did indeed increase as the length of time lived in a democratic system increased. Science, this issue p. 1145 The more years you live in a democracy, the more you prefer it over other political systems. Democracies depend on the support of the general population, but little is known about the determinants of this support. We investigated whether support for democracy increases with the length of time spent under the system and whether preferences are thus affected by the political system. Relying on 380,000 individual-level observations from 104 countries over the years 1994 to 2013, and exploiting individual-level variation within a country and a given year in the length of time spent under democracy, we find evidence that political preferences are endogenous. For new democracies, our findings imply that popular support needs time to develop. For example, the effect of around 8.5 more years of democratic experience corresponds to the difference in support for democracy between primary and secondary education.

Hours Worked in Europe and the Us: New Data, New Answers

We use national labor force surveys from 1983 through 2011 to construct hours worked per person on the aggregate level and for different demographic groups for 18 European countries and the US. We find that Europeans work 19% fewer hours than US citizens. Differences in weeks worked and in the educational composition each account for one third to one half of this gap. Lower hours per person than in the US are in addition driven by lower weekly hours worked in Scandinavia and Western Europe, but by lower employment rates in Eastern and Southern Europe.

Does Product Familiarity Matter for Participation

The German reunification experiment provided sudden access to previously unavailable financial products, supported by knowledgeable practitioners. This setting offers new perspectives on participation, inertia, and product diffusion. Controlling for characteristics, East Germans experienced a jump in securities participation to a level comparable to West Germans’ participation immediately following reunification, and to an even higher level for consumer debt, while exhibiting inertia in previously accessible products. They showed no signs of subsequent retreat. Lower financial resources are the most important characteristic explaining lower East German participation in all asset classes, while expectations and peer effects drive the higher East German debt participation.

Quantifying the Disincentive Effects of Joint Taxation on Married Women's Labor Supply

We quantify the disincentive effects of elements of joint taxation in the labor income tax codes of 17 European countries and the US. We analyze the extent to which hours worked of married men and women would change if each country switched to a system of separate taxation of married couples. In this hypothetical tax reform, we keep the average tax burden of married households constant. With the exception of four countries featuring already a system of separate taxation, the model predicts that married womens hours worked increase on average by 115 hours, or 10.5 percent, through this reform.