Abstract
How do firms learn to forecast future business conditions after major structural changes to the economy? How long does it take? We exploit German Reunification as a natural experiment, where firms in the East are treated with ignorance about the distribution of market states, to test a Bayesian learning framework. As predicted, we find that Eastern firms initially forecast future business conditions worse than Western ones, but this gap gradually closes over the three quarters of a decade following Reunification. The slow convergence stems from differences in forward expectations rather than realized market conditions. These results warn of costly and drawn out firm-level adjustments to contemporary regime changes, such as the US-China Trade War, COVID19 and Brexit.
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