On the Differences Between the Marginal Product of Capital Across Countries

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.