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Why Does Capital Flow to Rich States?

  • Sebnem Kalemli-Ozcan

    (University of Houston and NBER)

  • Ariell Reshef

    (University of Virginia)

  • Bent E Sørensen

    (University of Houston and CEPR)

  • Oved Yosha

    (Tel Aviv University)

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.

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 92 (2010)
Issue (Month): 4 (November)
Pages: 769-783

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Handle: RePEc:tpr:restat:v:92:y:2010:i:4:p:769-783
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