Factor prices under integrated markets for risky capital

Abstract

When returns to domestic and foreign capital are random and imperfectly correlated, risk averse savers will generally diversify their portfolios if permitted to do so. In such a setting free trade in capital is inconsistent with factor-price equalization so long as countries differ. Returns to capital are likely to be higher in economies which are more cyclical, which are generally more efficient, which have a larger labor force, or whose citizens tend to save less. When countries differ along any of these dimensions their mutual current account balance is also unlikely to tend towards zero.