The Public and Private MPK

Why doesn’t capita flow to developing countries as predicted by the neoclassical model? Is the explanation simply that cross-country marginal productivity of capital (MPK) is equalized, and if so, why? We revisit these issues by unpacking MPK into its public and private components, since there is good reason to believe that the process of MPK determination is enormously different across the two sectors especially in developing countries. We do so by calculating MPK schedules across the two sectors, in a large sample of advanced and developing countries. The main findings are twofold: Using updated investment data shows that MPK is not only flat but rather slightly positively sloped. More importantly, this finding is mainly driven by the public sector — public MPK is strongly positively sloped while private MPK is flat. We offer a possible intepretation of this surprising result and advance a new explanation for the Lucas paradox related to the behavior of the public sector.