Global Wealth Divide Widens as Capital Flows Favor the Rich
Capital market imperfections like private information and costly state verification impact international capital flows between countries with different initial capital stocks. A model with overlapping generations shows that in a closed economy, capital stocks will converge to the same level. However, in an open economy with mobile financial capital, interest rates equalize but investment levels differ due to varying net worth. Wealthy countries tend to invest in poorer countries, but under certain conditions, capital can flow in the opposite direction.