The Marginal Product of Capital: A Persistent International Puzzle

35 Pages Posted: 25 Sep 2008

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Debdulal Mallick

Emory University - Department of Economics

Date Written: September 2008

Abstract

Large and sustained differences in marginal products of capital (MPKs) across countries are sharply at odds with the core implications of the neoclassical framework. Lucas (1990) and many subsequent studies have examined reasons for this MPK differential. In a recent contribution, Caselli and Feyrer (2007) take the ground out from under this debate by reconsidering measurement issues and concluding that the MPK differential vanishes. Despite Caselli and Feyrer's important advances in measurement, the international MPK puzzle persists. We show that the measurement of MPKs in their framework is substantially affected by adjustment costs in the accumulation of capital. With the proper technology and a plausible parameterization of adjustment costs, the MPK in poor countries is much higher than the MPK in rich countries. Why capital flows do not eliminate the MPK differential remains a persistent international puzzle. We examine the quantitative importance of financial frictions, relative prices, and adjustment costs in accounting for the MPK differential and document that adjustment costs provide the leading explanation.

Keywords: marginal product of capital, adjustment costs, macroeconomic analysis of economic development, international capital flows

JEL Classification: O11, O16, E22

Suggested Citation

Chirinko, Robert S. and Mallick, Debdulal, The Marginal Product of Capital: A Persistent International Puzzle (September 2008). CESifo Working Paper Series No. 2399. Available at SSRN: https://ssrn.com/abstract=1273530

Robert S. Chirinko (Contact Author)

University of Illinois at Chicago, Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~chirinko/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Debdulal Mallick

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

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