Working Paper: CEPR ID: DP5203
Authors: Francesco Caselli; James Feyrer
Abstract: Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows. Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions. The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products. We find that the MPK is much higher on average in poor countries. However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial market frictions. Instead, the main culprit is the relatively high cost of investment goods in developing countries. One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries' incomes.
Keywords: capital flows; investment
JEL Codes: E22; O11; O16; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| marginal product of capital (MPK) in poorer countries (F29) | marginal product of capital (MPK) in richer countries (F29) |
| capital allocation inefficiencies (D61) | global GDP (F62) |
| higher costs of investment goods (E22) | marginal product of capital (MPK) in poorer countries (F29) |
| financial rates of return on capital investments (G31) | marginal product of capital (MPK) in poorer countries (F29) |
| increased aid flows to developing countries (F35) | incomes in developing countries (F63) |