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Title: The Role of Comparative Advantage in Shaping Economic Geography – Evidence from East Germany (joint with Andreas Lichter and Max Löffler)

Abstract

This paper exploits Germany’s division and unexpected reunification as a natural experiment to investigate the role of comparative advantage in shaping regions‘ industrial specialization. Using product-level trade data from the 1980s, we first derive East German manufacturing industries‘ revealed comparative advantage relative to West Germany. Standard Ricardian forces predict that in response to market integration East German regions‘ industrial specialization should evolve according to their comparative advantage. Our empirical evidence strongly confirms this prediction. Moreover, and in line with our interpretation of reunification acting as market integration shock, effects are significantly stronger in regions‘ close to West Germany.