Research Summary

Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation (joint with Sebnem Kalemli-Ozcan and Vadym Volosovych)

by Laura Alfaro

Description

We examine the role of different explanations for the lack of flows of capital from rich to poor countries -- the Lucas paradox -- in an empirical framework. Broadly, the theoretical explanations for this paradox include differences in fundamentals affecting the production structure versus capital market imperfections. Our empirical evidence, based on cross-country regressions, shows that for the period 1971-1998, institutional quality, which is a fundamental, is the most important causal variable explaining the Lucas paradox. Human capital and asymmetric information do play a role as determinants of capital flows but these variables cannot account for the paradox.

Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation