ON THE DIFFERENCES BETWEEN THE MARGINAL PRODUCT OF CAPITAL ACROSS COUNTRIES

Authors

  • ALEX LUIZ FERREIRA

    1. University of São Paulo
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    • Manuscript received 15.4.08; final version received 25.6.09.

    • I acknowledge the invaluable support from the State of São Paulo research foundation (Fundação de Amparo à Pesquisa do Estado de São Paulo) and from the University of São Paulo. I would also like to thank, without implicating, Alexandre Chibebe Nicolella, Jaylson Jair da Silveira, Miguel Leon-Ledesma, João Ricardo Faria, seminar participants at the Catholic University of Brazilia and two anonymous referees for comments on a previous version of this paper.


Abstract

We extended the standard neoclassical model of investment for the case of an open economy. Our model shows that risk premium not only creates a wedge between the marginal product of capital across countries but also reduces an economy's savings rate. A riskier market thus presents a lower income per capita, ceteris paribus. Our empirical analysis, from 1950 to 2003, lends support to the conclusion that both risk and the correction for output price to investment ratio help to explain the differentials.

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