Firms learning without markets

By Paul Walker 17/07/2013


Being able to judge market signals and learn from what they are telling you is important for any firm operating within a market system. But what if your firm worked outside of a market system, Would it still have the skills to respond to market information? The answer appears to be no. A new NBER paper from Thomas Triebs and Justin Tumlinson argues that firms operating outside the market system — the former East Germany in this study — do not have the ability to judge market signals. Triebs and Tumlinson look at firms in East and West German, after unification had taken place, and they find that East German firms did not anticipate, or respond to, market information as well as their West German counterparts. This suggest that firms operating under the Communist system lost, or never had, the ability to function within a market setting.

See “Learning Capitalism the Hard Way—Evidence from Germany’s Reunification” by Thomas P. Triebs and Justin Tumlinson, NBER Working Paper No. 19209, July 2013:

Communism in East Germany sought to dampen the effect of market forces on firm productivity for nearly 40 years. How did East German firms respond to the free market after being thrust into it in 1990? We use a formal learning model and German business survey data to analyze the lasting impact of this far-reaching treatment on the way firms in former East Germany predicted their own productivity relative to firms in former West Germany during the two decades since Reunification. We find in confirmation of our formal model’s predictions, that Eastern firms forecast productivity less accurately, particularly in dynamic and uncertain markets, but that the gap gradually closed over 12 to 13 years. Second, by analyzing the direction of firm level errors in conjunction with contemporaneous market signals we find that, in the years immediately following Reunification, Eastern firms estimate the market’s role as generally less potent than Western firm do, an observation consistent with overweighting experiences from the communist era; however, over roughly 14 years both converge to the same (incorrect) overestimate of the market’s role on their productivity.

A less extreme example of the same issue is adjustment by New Zealand firms to the 1980s reforms. A point noted by Eric on twitter: