The profit elasticity of investment in West Germany and the investment diversion effects of unification

This paper estimates investment equations for pre-unification West Germany in which changes in profitability have strong explanatory power with respect to changes in real investment. Accordingly, post-unification decline in profitability suggests that investment by west German firms in eastern Germany entailed investment diversion. In addition, we explain how we calculate t-statistics for long-run coefficients arising from Almon lag and partial adjustment models.