Department of Economics

Why capital does not flow more heavily into poorer countries with lower capital-labor ratios is a

question that development economists have been asking for decades. Caselli and Feyrer (2007)

developed adjusted marginal product of capital (MPK) models that are very similar across rich and

poor countries, proving that capital is indeed allocated efficiently across the world and there are

no major frictions preventing optimal allocation of capital. This paper uses updated and improved

national accounts data to replicate the methodology set forth in Caselli and Feyrer (2007), testing

the long-term validity of their conclusions as well as the effects of the Great Recession on

international capital flows between developed and developing countries. I find that while the Great

Recession negatively impacted MPKs in both rich and poor countries, capital flows and output

growth have since recovered, and MPKs are still very similar across all countries. This study

provides support for Caselli and Feyrer’s conclusions on the causes of low capital-labor ratios in

poorer countries, as well as the view that capital is indeed allocated efficiently across countries.