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Why doesn't capital flow from rich to poor countries? An empirical investigation

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  • Laura Alfaro
  • Sebnem Kalemli-Ozcan

Abstract

We examine the role of di erent explanations for the lack of flows of capital from rich to poor countries−the Lucas paradox−in an empirical framework. Broadly speaking, the theoretical explanations for this paradox include di erences in fundamentals a ecting the production structure versus international capital market imperfections. Our empirical evidence, based on cross-country regressions, shows that for the period 1971−1998, institutional quality is the most important causal variable explaining the Lucas paradox. Human capital and asymmetric information play a role as determinants of capital inflows but these variables cannot fully account for the paradox

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 53.

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Date of creation: 2004
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Handle: RePEc:red:sed004:53

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Keywords: capital inflows; fundamentals; institutions; international capital market imperfections; neoclassical model;

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