Loayza, NormanKraay, AartVentura, JaumeServén, Luis2013-06-192013-06-192004-04https://hdl.handle.net/10986/14013Capital flows to developing countries are small and take mostly the form of loans rather than direct foreign investment. We build a simple model of North-South capital flows that highlights the interplay between diminishing returns, production risk and sovereign risk. This model generates a set of country portfolios and a world distribution of capital stocks that resemble those in the data.en-USCC BY 3.0 IGOCAPITAL FLOWDEVELOPING COUNTRIESLOANSFOREIGN INVESTMENTCAPITAL STOCKSLENDINGIMPORTSPOOR COMMUNITIESHUMAN CAPITALTECHNOLOGYGROSS DOMESTIC PRODUCT ASSET PRICESASSETSASYMMETRIC INFORMATIONBENCHMARKBONDSBORROWINGCAPITAL FLOWSDEBTDIMINISHING RETURNSDISTRIBUTION OF WEALTHEQUALIZATIONEQUATIONSEQUILIBRIUMEXPECTED RETURNEXPECTED VALUEEXPROPRIATIONEXTERNALITYFINANCIAL MARKETSFINANCIAL TRANSACTIONSFOREIGN ASSETSFOREIGN DIRECT INVESTMENTFOREIGN INVESTMENTFOREIGN INVESTORSGDPHUMAN CAPITALIMPORTSINCOMEINEFFICIENCYINTEREST RATEINTEREST RATESINTERNATIONAL FINANCIAL TRANSACTIONSINTERNATIONAL TRADELAWSMARGINAL PRODUCTMARGINAL UTILITYMARGINAL VALUEMORAL HAZARDNASH EQUILIBRIUMPENALTIESPORTFOLIOPORTFOLIO DIVERSIFICATIONPORTFOLIOSPROBABILITY OF DEFAULTPRODUCTION TECHNOLOGYPRODUCTIVITYRISK PREMIUMRISK SHARINGSECURITIESSOVEREIGN RISKWEALTHWorld Bank10.1596/1813-9450-3320