The Review of Economics and Statistics Vol. 92 No. 4 2010

Why Does Capital Flow to Rich States?

Şebnem Kalemli-Özcan; Ariell Reshef^1,2,3; Bent E. Sørensen^4,5; Oved Yosha^1,6,2

¹ National Bureau of Economic Research · ² Langston University · ³ University of Virginia · ⁴ Center for Economic and Policy Research · ⁵ University of Houston · ⁶ Tel Aviv University

Abstract

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.

DOI

10.1162/rest_a_00028

Volume

92

Issue

4

Pages

769-783

Language

en

Sources

openalex crossref

Cite

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