Barriers to Global Capital Allocation

Bruno Pellegrino, Enrico Spolaore and Romain Wacziarg

No 9086, CESifo Working Paper Series from CESifo

Abstract: Observed international investment positions and cross-country heterogeneity in rates of return to capital are hard to reconcile with frictionless capital markets. In this paper, we develop a theory of international capital allocation: a multi-country dynamic spatial general equilibrium model in which the entire network of cross-border investment is endogenously determined. Our model features cross-country heterogeneity in fundamental risk, a demand system for international assets, and frictions that cause segmentation in international capital markets. We measure frictions affecting international investment and apply our model to data from nearly 100 countries, using a new dataset of international capital taxes and cultural, geographic and linguistic distances between countries (geopoliticaldistance.org). Our model performs well in reproducing the composition of international portfolios, the cross-section of home bias and rates of return to capital, and other key features of international capital markets. Finally, we carry out counterfactual exercises: we show that barriers to international investment reduce world output by almost 7% and account for nearly half of the observed cross-country differences in capital stock per employee.

Keywords: capital allocation; cultural distance; geography; information frictions; international finance; international investment; misallocation; open economy; rational inattention (search for similar items in EconPapers)
JEL-codes: E22 E44 F20 F30 F40 G15 O40 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-fdg, nep-int, nep-mac and nep-opm
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Barriers to global capital allocation (2024)
Working Paper: Barriers to Global Capital Allocation (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9086

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