Why Does Capital Flow to Rich States?
University of MARYLAND, Department of Economics; National Bureau of Economic Research (NBER); Koc University, Graduate School of Business
University of Virginia; New York University (NYU) - Department of Economics
Bent E. Sorensen
University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)
Tel Aviv University - The Eitan Berglas School of Economics (Deceased)
CEPR Discussion Paper No. 5635
We study the determinants of net capital income flows within the United States. We analyze a simple multi-state neoclassical model in which total factor productivity varies across states and over time and capital flows freely across state borders. The model predicts that capital will flow to states with relatively high output growth. Since relative growth patterns are persistent such states are also high output states, which implies that high output will be associated with inflows of capital and net outflows of capital income. Our empirical findings correspond well to the predictions of the model and indicate persistent net capital income flows and net cross-state investment positions between states which are an order of magnitude larger than observed capital income flows between countries. Thus, our results imply that frictions associated with national borders are likely to be the main explanation for 'low' international capital flows.
Number of Pages in PDF File: 56
Keywords: Capital flows, ownership, historical income, net factor income
JEL Classification: F21, F41working papers series
Date posted: July 18, 2006
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