The Public and Private Marginal Product of Capital

Why does capital not flow to developing countries as predicted by the neoclassical model? What are the direction and degree of capital misallocation across nations? We revisit these questions by removing public capital from total capital to achieve a more accurate estimate of the marginal productivi...

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Bibliographic Details
Published inEconomica (London) Vol. 86; no. 342; pp. 336 - 361
Main Authors Lowe, Matt, Papageorgiou, Chris, Perez‐Sebastian, Fidel
Format Journal Article
LanguageEnglish
Published London Blackwell Publishing Ltd 01.04.2019
Subjects
Developing countries
Economic models
LDCs
Productivity
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Summary:Why does capital not flow to developing countries as predicted by the neoclassical model? What are the direction and degree of capital misallocation across nations? We revisit these questions by removing public capital from total capital to achieve a more accurate estimate of the marginal productivity of private capital. We calculate marginal product of capital schedules in a large sample of advanced and developing countries. Our main result is that, in terms of the Lucas Paradox, private capital is allocated remarkably efficiently across nations. Tentative estimates of the marginal productivity of public capital suggest that the deadweight loss from public capital misallocation across countries can be much larger than that from private capital.
ISSN:0013-0427
1468-0335
DOI:10.1111/ecca.12268