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Abstract

Two decades of re-unification have done little to bring down economic disparities between East and West Germany. Since formal institutions have been equalized between East and West, any institutional explanation for enduring divergence has to lie in norms, beliefs, and values. An oft-heard argument is that Germany suffers from a “wall in the head” that continues to feed differences in economic performance between East and West. The question is whether such structural differences in norms and values indeed exist in such a way that they can explain the gap in economic performance. The little research that has been done provides ambiguous results (Shiller et al. AER, 1991; Corneo and Grüner JPUBE, 2002; Alesina and Fuchs-Schündeln AER, 2007). This paper presents a more direct assessment of the differences in preferences between East and West Germans by studying the structure of happiness and analyze how the East and the West differentially transform situational factors into well-being. Our analysis convincingly shows that preferences do not vary much between East and West, and that, if anything, the East entertains values that are more usually associated with economic performance than those of the West. The “wall in the head”-thesis appears to be a myth.