Pennies from heaven: Entry fees to a socialist “paradise”

Abstract

Based on a political-economic perspective, this paper assesses the former GDR-regime's policy of obligatory exchange (Pflichtumtauschsatz). ThePflichtumtausch, one of a wide array of instruments used to collect convertible currency and restrict access to the GDR, is briefly described. Following that, a demand function, relating visits to East Germany on the one hand to thePflichtumtauschsatz on the other, is estimated. The empirical evidence adduced suggests that visits to the East were considered a normal good. The next question considered is whether the GDR-regime, acting in its role as a monopolist, followed an optimal pricing policy. On both theoretical and empirical grounds this can be rejected. Visits to the East were underpriced. This resulted in a higher number of visits and lower revenue when seen from a profit-maximizing perspective. On the other hand the actual pricing was advantageous with respect to two goals: the deterrence of visits and the collection of convertible currency. Nonetheless, it is clear that the GDR-regime voluntarily restricted its revenue collection from thePflichtumtausch. This restraint, however, can be seen as its input into a political bargain. As a rule, such “good manners” in the matter of thePflichtumtausch were more than compensated by interest payments saved in the use of the Swing. The GDR-regime's generosity thus turned out to be a rather expensive good for the West Germans.