Do Rich Countries Invest Less in Poor Countries Than the Poor Countries Themselves?

Could a rich-country social planner, capable only of forcing capital flows across borders but not directly into the hands of individual poor-country entrepreneurs, improve the efficiency of the global capital allocation? She could—but only to the extent that market failures cause wealth bias, and moreover, only to the extent that those market failures drive wedges expressly across international boundaries. A novel empirical framework uses standard data to conclude that 85% of wealth bias, whether caused by market failure or not, is domestic in origin. That is, poor country lenders are deterred from investing in poor countries to nearly the same degree that richcountry lenders are. Schematically speaking, investors at the National Stock Exchange in Mumbai face much the same incentives to invest in India as do their counterparts on Wall Street