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Barriers to global capital allocation

Bruno Pellegrino, Enrico Spolaore and Romain Wacziarg

No 346, Working Papers from The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State

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 F2 F3 F4 G15 O4 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-dge, nep-int and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Barriers to Global Capital Allocation (2021) Downloads
Working Paper: Barriers to Global Capital Allocation (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cbscwp:303525

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