Working Paper: NBER ID: w1075
Authors: Gene M. Grossman; Assaf Razin
Abstract: In this paper, we analyze the determinants of international movements of physical capital in a model with uncertainty and international trade in goods and securities.In our model, the world allocation of capital is governed, to some extent, by the asset preferences of risk averse consumer-investors. In a one-good variant in the spirit of the MacDougall model, we find that relative factor abundance, relative labor force size and relative production riskiness have separate but interrelated influences on the direction of equilibrium capital movements.These same factors remain important in a two-good version with Heckscher-Ohlin production structure. In this case, the direction of physical capital flow is determinate (unlike in a world of certaint and may hinge on the identity of the factor which is used intensively in the industry with random technology.
Keywords: international capital movements; uncertainty; trade in securities; risk aversion
JEL Codes: F21; F23; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relative factor abundance (E25) | capital flows (F32) |
| relative labor force size (J21) | capital flows (F32) |
| relative production riskiness (D81) | capital flows (F32) |
| smaller autarky endowment of capital (D29) | capital flows towards that country (F32) |
| smaller labor force (J21) | capital flows towards that country (F32) |
| riskier production environment (D29) | capital flows towards less risky country (F32) |