The two Germanies: Information technology and economic divergence, 1949-1989

Post reunification estimates of East German per capita income were barely one-half the officially reported level. This paper tries to explain this discrepancy and to account for the implied postwar economic divergence between the two Germanies. The statistical discrepancy is attributed to a deterioration in the quality of East German production that coincided with the introduction of information technologies. Institutional arrangements were not allowed to adapt and became inefficient. Economic divergence is explained with a model of collusion in which the East German regime failed to make the necessary structural adjustment.