Barriers to Global Capital Allocation

71 Pages Posted: 13 Jan 2021 Last revised: 13 Jan 2022

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 3 versions of this paper

Date Written: December 21, 2020

Abstract

Observed patterns of international investment are difficult to reconcile with frictionless capital markets. In this paper, we provide a quantitative theory of international capital allocation: a multi-country dynamic general equilibrium model with rationally-inattentive investors, where cross-border investment is subject to both information and policy frictions. These frictions result in a persistent misallocation of capital across countries. We estimate model parameters using nationality-based, bilateral investment data, and measures of geographic, linguistic and cultural distance, which capture information frictions. Our unified theoretical-empirical framework can account for several stylized facts: the gravity structure of investment flows, home bias, persistent global imbalances and capital return differentials across countries, as well as the paucity of net flows from developed to emerging economies. Finally, we perform counterfactual exercises: we find that information and policy barriers to international investment greatly amplify the capital gap between rich and poor countries, and result in a large reduction in world output.

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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