Stubbornly Persistent Factor Migrations with Rapid International Economic Convergence
A model of persisting labor and capital migrations is proposed which relies on capital installation adjustment costs. Labor and capital markets are supposed internationally integrated with free factor movements imposing a 'law of one price' on the gross return to each factor. The development of infrastructure and other capital projects however is accompanied by adjustment costs that create a divergence between the gross and net returns to capital. This makes it optimal to accumulate capital only gradually. Thus, although there is rapid international economic convergence because returns on traded assets and labor are internationally determined, labor and capital immigrations persist. The consistency of this model with some stylized facts of experience is examined using data for four high factor immigration economies from 1870-1991. Copyright 1996 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia
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