Net Capital Flows and Productivity: Evidence from U.S. States

Abstract

We study capital flows between U.S. states. We present a simple neoclassical model with total factor productivity (TFP) that varies across states and over time and where capital freely moves across state borders. In this framework capital flows to states that experience a relative increase in TFP. While TFP can not be directly observed, we can identify states with high TFP growth as states with high output growth. By comparing the level of personal income to output, we construct indicators of capital flows into a state. We then examine if capital (on net) flows to states which experience relative increases in TFP. We find this prediction clearly confirmed by the data.