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Germany’s economy is so bad even sausage factories are closingIWHThe Economist, January 15, 2026
Using survey experiments in the United States and Germany with about 12,000 participants, we study perceptions of socioeconomic inequality in life expectancy and policy demand. Respondents overestimate the rich-poor gap in both countries, judging the life expectancy of the rich roughly accurately but placing that of the poor well below its true level. These misperceptions vary little with political orientation or other characteristics. Correcting them shifts concern but leaves policy demand largely unchanged across general, specific, and real-stakes measures. Instead, demand divides politically, sharply in the United States and much less in Germany, consistent with views about the role of government rather than the inequality itself shaping policy demand.
This paper provides theory and evidence on micro-level pricing behavior needed to model an aggregate New Keynesian Phillips Curve. We start with individual firms that are heterogeneous in their production technology and in the demand curves they face. We estimate the parameters of supply and demand curves by utilizing prices and quantities of outputs and factor inputs of firms along with exogenous downstream demand instruments from global input-output and trade data. The research addresses model heterogeneity using a clustering method to classify firms according to their production technology and observed price pass-through. The results show that more productive firms exhibit a lower price response to changes in demand. We find that the aggregate price response to demand shocks will be smaller when more productive firms absorb a larger portion of demand shocks, which generally is the case. At the same time, our results imply that idiosyncratic shifts in demand to clusters of firms with more rapidly rising marginal cost curves, or cost shocks to clusters of firms with high pass-through, will result in a higher aggregate price response. Finally, this paper provides a framework to incorporate heterogeneous pricing behavior into an estimate of the slope of the aggregate Phillips Curve.
We examine whether combining factual information on inflation levels and forecasts with a narrative can persistently shape consumers’ inflation expectations. In a preregistered randomized controlled trial with a representative sample of 3,000 German consumers, participants received either numerical or textual information about inflation rates, with or without an accompanying narrative. All treatments immediately lower inflation expectations, with numerical information eliciting stronger adjustments. Adding a narrative produces no additional immediate effect, confirming that it conveys no new information. However, only the combination of numerical information with a narrative yields a lasting reduction in inflation expectations and forecast uncertainty still observable after four weeks. Our results suggest that combining precise information with a narrative enhances information retention and can lead to more persistent shifts in consumers’ beliefs. The effects are strongest when respondents perceive the narrative as relatable and emotionally engaging, and among those with low financial literacy and limited knowledge of inflation.
This paper examines whether common institutional ownership is associated with CEO connectedness across firms. We document that higher common ownership between two same-industry firms predicts a greater likelihood that a newly appointed CEO has preexisting social ties to the incumbent CEO of the peer firm. To address endogeneity, we use mergers among institutional investors in a stacked difference-in-differences design. In a hiring-firm-peer panel that carries connection status forward from the most recent appointment, exposure to a merger-induced common blockholder approximately doubles the probability that the pair is observed in a connected-CEO state. In a broader firm-pair panel, it increases the probability of CEO connections by 48.7%. We further document that gaining CEO connections through another firm’s CEO appointment is associated with improvements in peer firms’ returns on assets and Tobin’s Q, in both OLS and IV specifications. Peer firms that gain such a connection also experience positive abnormal returns around other firms’ CEO hiring announcements, corresponding to an average increase of $112.5 million in shareholder value. These performance patterns suggest that CEO connections may be valuable from a portfolio-level perspective. Consistent with this interpretation, the association between common ownership and CEO connections is concentrated among product-similar and organizationally complex firms and strengthens after the 2008–2009 financial crisis, when connections appear more valuable. Our findings point to CEO connection as a potential governance channel through which common institutional ownership is linked to firm outcomes, complementing prior work on executive compensation, shareholder voting, and board interlocks.
We revisit the employer size wage effect (ESWE) – arguably the most basic and influential departure from the law of one price for labor. Our main result is that this canonical fact disappears completely across establishments within the same firm, even though they operate in different local labor markets. We uncover and dissect this fact by including a firm fixed effect in otherwise standard cross-sectional regressions of wages on establishment size. We implement this demanding specification in population-wide triple-linked firm-establishment-employee data in Germany. This result is new in the ESWE literature (for which our paper also provides the first systematic meta-analysis). This wage-size decoupling is hard to square with the view that employment is determined along a finitely elastic employerspecific labor supply curve – i.e., employers pay exactly the minimum needed for the quantity of labor, but no more – the foundation of the monopsony view. By contrast, large multi-establishment firms (MEF) appear to hire off their labor supply curves (or those curves are very elastic), pay wage premia above the monopsonistic minimum, and leave excess labor supply. We find some evidence for a reemergence of the ESWE within low-premium MEFs. Overall, at least for the 25% of German employment in large firms for which the ESWE disappears, wage setting and employment determination may be better accounted for by alternative models, namely accommodating above-market-clearing wage premia and rationing of labor supply, such as efficiency wage theories.
We study how idiosyncratic income risk shapes the aggregate and distributional effects of labor and capital income taxation in dynamic general equilibrium models. To this end, we compare a heterogeneous-agent (HA) model with uninsurable idiosyncratic labor productivity risk and a ten-representative-agent (TE) model in which households correspond to fixed wealth deciles without such risk. At the aggregate level, both models generate qualitatively similar responses; however, the HA model exhibits a smaller recessionary impact driven by precautionary savings behavior, which stabilizes investment. At the distributional level, the models differ sharply. In the HA framework, tax shocks trigger endogenous mobility across wealth deciles. These inter-decile transition dynamics tend to benefit lower deciles. In contrast, the TA model features fixed household positions. Our findings highlight that while simpler multi-representative-agent models can approximate aggregate dynamics well, they may miss important distributional adjustment channels. The relevance of these mechanisms ultimately depends on the empirical importance of mobility across the wealth distribution, pointing to a key trade-off between model simplicity and accuracy.
This paper provides new causal evidence on how patent allowances affect firms and their employees based on quasi-random assignment of patent applications to examiners. Exploiting employer-employee records with newly linked German firm data and web-scraped patent documents, we show that patent-induced shocks reduce firm exit, improve productivity, and increase wages, with rent-sharing elasticities between 0.10 and 0.21. Wage gains are broadly observed across occupational tasks, with high heterogeneity: managers benefit disproportionately in publicly traded firms, whereas broader wage increases accrue to workers in non-traded firms. Our findings highlight the role of institutional features and firm organization in shaping how rents are shared.
This paper develops a micro-founded framework linking price-cost and wage markups to intangible assets. Intangible assets, once created, are a source of firm rents. Owing to limits to enforceable ownership and the non-rival nature of knowledge, these rents can be both retained by the origin firm and transferred to a competitor through poaching of workers. Search and matching frictions affect labor mobility and result in bargaining over rents between the firm and the worker. This environment generates hold-up in intangible asset creation and motivates rent sharing. Under non-compete agreements, poached workers face start delays that weaken outside options. Using microdata from the Netherlands, we document higher price-cost and wage markups in more intangible-intensive firms and lower wages for workers with non-compete agreements, consistent with the model.
Many countries and regions remain below the level of economic activity of the world’s most advanced economies. Some countries form growth clubs, some are stuck in the middle-income trap, and some stay on a very low level of economic activity. Although this situation is well documented on the country level, there is less evidence at the sub-national level within countries. We estimate county-level capital stocks and price indices and provide a comprehensive county-level data set for Germany. We find no evidence of convergence across all counties even if we condition on important drivers of long-term growth such as physical and human capital accumulation. Instead, we identify five convergence clubs, using endogenous clustering. We analyze differences in growth paths and describe the identified clusters based on variations in contributions of capital, labor, and total factor productivity to economic growth. Additionally, we examine the role of migration for regional development and find that net migration has in particular contributed to growth in richer regions.
Firms increasingly rely on markets for technology to acquire innovations developed outside their boundaries, yet acquiring intellectual property rights alone often does not guarantee successful implementation. Many technologies depend on tacit know-how that must be supplied by the provider after the transaction is completed. This paper examines whether common ownership between a technology provider and a potential adopter mitigates this implementation problem. I develop a model in which overlapping institutional investors cause the provider to partially internalize the adopter’s gains from successful implementation, strengthening incentives to transfer tacit know-how. This mechanism operates only when know-how is unverifiable – absent this friction, common ownership leaves matching and outcomes unchanged. Under moral hazard, the model predicts that common ownership increases the likelihood of technology transfer to a given adopter, that this effect is stronger when tacit know-how is more important, and that common ownership improves post-transfer outcomes conditional on adoption. I test these predictions using U.S. patent reassignments between publicly traded firms. Using within-deal variation across competing potential adopters and plausibly exogenous variation from passive index-fund holdings, I show that common ownership increases the likelihood that a firm acquires a technology, particularly when the transferred bundle is more tacit. Common ownership predicts stronger subsequent innovation and higher future firm value, especially when ownership overlap is concentrated among investors with stronger incentives to monitor the provider. These findings show how ownership structure shapes interfirm technology transfer by affecting not only who acquires a technology, but also how much value is created.
