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Why does not capital frlow from rich to poor countries? An Empirical investigation

  • Laura Alfaro
  • Sebnem Kalemli-Ozcan

We examine the role of different 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 differences in fundamentals affecting the production structure versus international capital market imperfections. Our cross-country regressions show 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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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 416.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:416
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