TY  - JOUR
AU  - Ju,Jiandong
AU  - Wei,Shang-Jin
TI  - A Solution to Two Paradoxes of International Capital Flows
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12668
PY  - 2006
Y2  - November 2006
UR  - http://www.nber.org/papers/w12668
L1  - http://www.nber.org/papers/w12668.pdf
N1  - Author contact info:
Jiandong Ju
Department of Economics
University of Oklahoma
Norman, OK  73019
E-Mail: jdju@ou.edu

Shang-Jin Wei
Graduate School of Business
Columbia University
Uris Hall 619
3022 Broadway
New York, NY 10027-6902
Tel: 212/854-9139
E-Mail: shangjin.wei@columbia.edu
AB  - International capital flows from rich to poor countries can be regarded as either too small (the Lucas paradox in a one-sector model) or too large (when compared with the logic of factor price equalization in a two-sector model). To resolve the paradoxes, we introduce a non-neo-classical model which features financial contracts and firm heterogeneity. In our model, free trade in goods does not imply equal returns to capital across countries. In addition, rich patterns of gross capital flows emerge as a function of financial and property rights institutions. A poor country with an inefficient financial system may simultaneously experience an outflow of financial capital but an inflow of FDI, resulting in a small net flow. In comparison, a country with a low capital-to-labor ratio but a high risk of expropriation may experience outflow of financial capital without compensating inflow of FDI.
ER  -