The Marginal Product of Capital

44 Pages Posted: 17 Jul 2006 Last revised: 26 Jul 2010

See all articles by Francesco Caselli

Francesco Caselli

London School of Economics & Political Science (LSE) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

James Feyrer

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: August 2005

Abstract

Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows. Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions. The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products. We find that the MPK is much higher on average in poor countries. However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial market frictions. Instead, the main culprit is the relatively high cost of investment goods in developing countries. One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries' incomes.

Suggested Citation

Caselli, Francesco and Feyrer, James, The Marginal Product of Capital (August 2005). NBER Working Paper No. w11551. Available at SSRN: https://ssrn.com/abstract=785009

Francesco Caselli (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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London WC2A 2AE
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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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James Feyrer

Dartmouth College - Department of Economics ( email )

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United States
603-646-2533 (Phone)
603-646-2122 (Fax)

National Bureau of Economic Research (NBER) ( email )

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United States

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