Managerial Ability and Capital Flows
Posted: 1 Feb 2010 Last revised: 4 Aug 2010
Date Written: February 1, 2010
Capital flows with low intensity and flows to middle-income countries. Physical and human capital alone cannot explain this pattern. I present a model to show how managerial ability - the ability to run risky projects - can increase total factor productivity and explain the pattern of capital flows. The model implies that countries with more high-ability managers use more risky projects and have higher productivity. I define proxies for managerial ability with data on physical and human capital, schooling, and entrepreneurship. Consistent with the pattern of capital flows, the model predicts similar returns to capital across countries and higher returns in middle-income countries.
Keywords: capital flows, managerial ability, human capital, entrepreneurs
JEL Classification: F2, F4, L26, O1
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