Bankruptcy and Voluntary Liquidation: Evidence for New Firms in East and West Germany after Unification

Exploiting the unique economic situation after German unification, I investigate how exit decisions deviate between new firms in a transition and a comparatively stable market environment. Two competing exit mechanisms are considered: entrepreneurial self-selection via voluntary liquidation and external selection based on insolvency regulation. Distinguishing between the competing exit modes proves to be crucial in semi-parametric proportional hazard-rate estimations. Comparing East and West Germany, I find distinct education and size effects and a higher share of bankruptcy-related liquidations in East Germany. These results are argued to reflect different industry structures, capital and labor market conditions in both parts of Germany.

Prantl, Susanne (2003), Bankruptcy and Voluntary Liquidation: Evidence for New Firms in East and West Germany after Unification, ZEW Discussion Paper No. 03-72, Mannheim.