Barriers to Global Capital Allocation

63 Pages Posted: 13 Jan 2021 Last revised: 22 Apr 2021

See all articles by Bruno Pellegrino

Bruno Pellegrino

University of Maryland - Robert H. Smith School of Business

Enrico Spolaore

Tufts University - Department of Economics

Romain T. Wacziarg

UCLA Anderson School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2020

Abstract

We quantify the impact of barriers to international investment, using a novel multi-country dynamic general equilibrium model with heterogeneous investors and imperfect capital mobility. Our model yields a gravity equation for bilateral foreign asset positions. We estimate this gravity equation using recently-developed foreign investment data that have been restated to account for offshore investment and financing vehicles. We show that a parsimonious implementation of the model with four barriers (geographic distance, cultural distance, foreign investment taxation, and political risk) accounts for a large share of the observed variation in bilateral foreign investment positions. Our model predicts (out of sample) a significant home bias, higher rates of return on capital in emerging markets, as well as “upstream” capital flows. In our benchmark calibration, we estimate that the capital misallocation induced by these barriers reduces World GDP by 7%, compared to a situation without barriers. We also find that barriers to global capital allocation contribute significantly to cross-country inequality: the standard deviation of log capital per employee is 80% higher than it would be in a world without barriers to international investment, while the dispersion in output per employee is 42% higher.

Keywords: Capital Flows, Foreign Investment, Culture, Institutions, Geography, Gravity, Interna- tional Macroeconomics, International Finance, Open Economy

JEL Classification: E22, E44, F2, F3, F4, G15, O4

Suggested Citation

Pellegrino, Bruno and Spolaore, Enrico and Wacziarg, Romain T., Barriers to Global Capital Allocation (December 21, 2020). Available at SSRN: https://ssrn.com/abstract=3752485 or http://dx.doi.org/10.2139/ssrn.3752485

Bruno Pellegrino (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

HOME PAGE: http://www.brunopellegrino.com

Enrico Spolaore

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States

Romain T. Wacziarg

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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