Transfer Payments without Growth: Evidence for German Regions, 1992–2005


  • Michael Koetter acknowledges financial support from the Netherlands Organization for Scientific Research (NWO). We would like to thank Steven Brakman, Heinz Herrmann, Dan Stegarescu and three anonymous IJURR referees for helpful comments and suggestions. Any remaining errors are, of course, our own.


After German reunification, interregional subsidies accounted for approximately 4% of gross fixed capital investment in the new federal states (i.e. those which were formerly part of the German Democratic Republic). We show that, between 1992 and 2005, infrastructure and corporate investment subsidies had a negative net impact on regional economic growth and convergence. This result is robust to both the specification of spatially weighted control variables and the use of instrumental variable techniques to control for the endogeneity of subsidies. Our results suggest that regional redistribution was ineffective, potentially due to a lack of spatial concentration to create growth poles.