Profits, ‘Superstar’ Firms and Capital Flows

In this paper, I study financial liberalization between economies with differing aggregate profit shares. I show that if firms compete oligopolistically, then economies which generate more very large — ‘superstar’ — firms enjoy higher aggregate profit shares. Embedding this setup in a two-country model with heterogeneous agents and non-homothetic saving behavior, I show that more profitable economies feature lower autarkic interest rate and experience capital outflows during financial liberalization. Calibrating the model to eight European economies, I show that the profit share gap can explain 29% of variation in the current account imbalances incurred between 1998 and 2019.