Net Capital Flows and Productivity: Evidence from U.S. States

Ariell Reshef Sebnem Kalemli-Ozcan and Bent Sorensen
Authors registered in the RePEc Author Service: Sebnem Kalemli-Ozcan and Ariell Reshef

The Institute for International Integration Studies Discussion Paper Series from IIIS

Abstract: We study net capital flows between U.S. states. We present a simple neoclassical model in which total factor productivity (TFP) varies across states and over time and where capital freely moves across state borders. In this framework capital flows to states that experience a relative increase in TFP thus creating net cross-state capital ownership positions. Net ownership positions converge to zero over time in the absence of further TFP movements. While TFP can not be directly observed, we can identify states with high TFP growth as states with high output growth. By comparing the level of personal income to output, we construct indicators of net capital flows into a state. We then examine empirically if the level of net capital flows between states following relative movements in TFP corresponds to the predictions of the model and whether net ownership positions tend to converge to zero. Our empirical results imply large flows of capital between states; for example, we find that a state with annual per capita output growth 1 percent higher than the average state over 10 years would attract capital in the amount of $9,900 per capita over those 10 years. These magnitudes are in close agreement with the predictions of the model. We conclude that frictions associated with borders are likely to be the main explanation for “low” international capital flows.

Keywords: regional net capital flows; ownership; dividend income; historical income (search for similar items in EconPapers)
Date: 2005-04-20
New Economics Papers: this item is included in nep-eff and nep-geo
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Citations: View citations in EconPapers (5)

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