The legacy effect of socialism on risky savings

ABSTRACT

The riskiness of individuals’ saving behaviour affects their old-age wealth and has wider-ranging implications for macroeconomic development and stability. To which extent individuals take financial risks depends on their preferences, which may be moulded by the economic system they live in. I analyse households’ financial risk taking after the collapse of the German Democratic Republic. Conditional on their income and financial wealth positions, East German households were more prone to financial risk taking than West German households after reunification. The differences in risk taking were quantitatively relevant shortly after reunification and gradually vanished until 2008. Risk taking of households who were exposed to the socialist system longer was higher.

KEYWORDS:

• Financial risk taking
• saving
• economic system
• legacy effect
• Germany

JEL:

• D14
• G11
• P34

Acknowledgements

I would like to thank Jens J. Krüger, an anonymous referee, and participants at the conferences of the Verein für Socialpolitik and the Eastern Economic Association, at which an earlier version titled “Economic systems and risk preferences: evidence from East and West Germany” was presented, for their comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ See, for example, Danielsson, Valenzuela, and Zer (2018) or Boţoc and Anton (2020). Moreover, the low volatility environment in East Germany also applies to real returns given stable prices. Based on information provided by the Statistisches Amt der DDR (1990), the lowest value of the yearly inflation rate was −0.7%, the largest 1.1%, and the median at 0% in the GDR during 1961 and 1989.

² There is no price information published by the German Statistical Office that allows to compare the price levels across the federal states. However, there is state-level information on changes of the price level from 1995 onward for 12 out of the 16 states. There does not appear to be a systematic difference in the inflation rates comparing East and West German states. For East (West) German states prices increased by 22.0% (22.4%) between 1995 and 2008. This piece of information is important to rule out a potentially alternative hypothesis of the findings in this paper, i.e. that differences in financial risk taking between East and West German households are driven by real financial wealth and real incomes.

³ As it is not known for all households that invest in risky assets how much they invest, the number of available observations drops to 167,550. As some households do not save out of their quarterly expenditures at all, there are fewer observations for the share of risky quarterly expenditures available.

⁴ For the GSOEP data, stocks and bonds are listed separately only since 2000. The German SAVE study starts in 2001 (Börsch-Supan et al. 2008), and the Panel of Household Finances was first conducted in 2010 (Deutsche Bundesbank 2013).

⁵ Note that wealth from accrued pension rights of the public pension system is not included in this measure due to a lack of information in the EVS. Likely there are differences between households in East and West Germany. Numbers on average monthly per-capita pensions for the post-reunification period published by Rentenversicherung (2017, 123) suggest this, although the differences are not overly large, and mostly driven by the higher labour force participation of women in the GDR compared to West Germany.

⁶ An analogous exercise was done for all West German states with equally approving results. These are available upon request.

⁷ See the Bankstellenstatistik of the German Bundesbank, various issues at http://www.bundesbank.de/Redaktion/DE/Standardartikel/Aufgaben/Bankenaufsicht/bankstellenberichte.html.