NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why Does Capital Flow to Rich States?

Sebnem Kalemli-Ozcan, Ariell Reshef, Bent Sorensen, Oved Yosha

NBER Working Paper No. 11301*
Issued in May 2005
NBER Program(s):   IFM    ITI

The magnitude and the direction of net international capital flows does not fit neo-classical models. The 50 U.S. states comprise an integrated capital market with very

low barriers to capital flows, which makes them an ideal testing ground for neoclassical

models. We develop a simple frictionless open economy model with perfectly diversified

ownership of capital and find that capital flows between the U.S. states are consistent

with the model. Therefore, the small size and "wrong" direction of net international

capital flows are likely due to frictions associated with national borders and not due

to inherent flaws in the neoclassical model.

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This paper was revised on February 12, 2009

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