Why Does Capital Flow to Rich States?

Sebnem Kalemli-Ozcan, Ariell Reshef, Bent Sorensen and Oved Yosha
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Oved Yosha: Tel Aviv University

The Review of Economics and Statistics, 2010, vol. 92, issue 4, 769-783

Abstract: The magnitude and the direction of net international capital flows do not fit neoclassical models. The fifty U.S. states comprise an integrated capital market with very low barriers to capital flows, which makes them an ideal testing ground for neoclassical models. We develop a simple frictionless open economy model with perfectly diversified ownership of capital and find that capital flows among the states are consistent with the model. Therefore, the small size and "wrong" direction of net international capital flows are likely due to frictions associated with national borders, not to inherent flaws in the neoclassical model. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2010
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Related works:
Working Paper: Why Does Capital Flow to Rich States? (2007)
Working Paper: Why Does Capital Flow to Rich States? (2006)
Working Paper: Why Does Capital Flow to Rich States? (2005)
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