Abstract
Informal institutions in transition economies do not immediately adjust to a change in formal institutions and they can affect economic outcomes. In this paper it is argued that locus of control beliefs and preferences concerning state action negatively affect the formation of new firms in former socialist countries. German reunification, in which the formerly Socialist East joined the Federal Republic of Germany, represents an intriguing natural experiment in which the formal institutional structure of one nation was almost fully transplanted into another. Traditional as well as psychological factors are econometrically examined. The results suggest that about one third of the east-west gap in new self-employment can be explained by persisting informal institutions.
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