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 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.Lowe gratefully acknowledges financial support from ESRC, award number ES/I02476X/1, and Perez-Sebastian from Ministerio de Economía y Competitividad and Fondo Europeo de Desarrollo Regional (ECO2015-70540-P MINECO/FEDER) and the Generalitat Valenciana (PROMETEO/2013/037). Papageorgiou acknowledges financial support from the UK Department for International Development