Why Does Capital Flow to Rich States?

Joint with: Sebnem Kalemli-Ozcan (University of Houston and NBER) and Ariell Reshef (NYU) and Oved Yosha

We study the determinants of capital income flows within the United States: are their magnitudes consistent with the predictions of a simple neoclassical model in which total factor productivity varies across states and over time and capital flows freely across state borders? We find that the answer to this question is affirmative. According to the model, capital will flow to states with relatively high output growth and, because relative growth patterns are persistent,such states also have high output. This implies that high output will be associated with in flows of capital and net out flows of capital income. Our empirical findings correspond well to the predictions of the model and indicate persistent net capital income flows and net cross-state investment positions between states which are an order of magnitude larger than observed capital income flows between countries. Thus, our results imply that frictions associated with national borders are likely to be the main explanation for "low" international capital flows.

For more information, contact Vee Roberson.