Working Paper: NBER ID: w27675
Authors: Anusha Chari; Jennifer S. Rhee
Abstract: In this paper, we use firm-level data to investigate the link between the marginal product of capital and financial rates of return across countries. Computed estimates from financial statement data show that capital-scarce countries display higher marginal products of capital. However, inflation-adjusted financial returns are roughly equal across capital-scarce and capital-abundant countries. The divergence between the marginal products of capital and financial returns implies that there may be little incentive for capital to flow to capital-scarce countries. We suggest that domestic capital-accumulation frictions such as sufficiently large capital adjustment costs can decouple financial rates of return from the marginal product of capital across countries.
Keywords: capital; marginal product of capital; financial returns; international capital flows; Lucas paradox
JEL Codes: E13; F21; G15; G32; O16
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) (E23) | financial returns (G12) |
| high marginal product of capital (MPK) (E22) | financial returns (G12) |
| domestic capital accumulation frictions (E22) | divergence between MPK and financial returns (G19) |
| lack of incentive for capital to flow to capital-scarce countries (F21) | high marginal product of capital (MPK) (E22) |
| marginal product of capital (MPK) (E23) | output per capita (E23) |
| marginal product of capital (MPK) (E23) | capital flows from developed to emerging markets (F21) |