The Long Shadow of Socialism: Puzzling Evidence on East-West German Differences in Financial Literacy

We use the German re-unification as a natural experiment to understand drivers of financial literacy accumulation. We find that 20 years after re-unification there is evidence for a significant financial literacy gap between East and West. While for instance women and those who have migrated from East to West have mastered to catch up with their West German peers, others did not. Decomposition of the financial literacy gap shows that most of it remains unexplained when including common factors explaining financial literacy acquisition. Thus, even if the socio-demographic differences between East and West were to vanish, differences in financial literacy would remain.