International Differences in the Marginal Product of Capital

Conventional wisdom has it that the return to capital equals the marginal product of capital. Consequently, an equal return to capital across countries is interpreted as evidence that the marginal product of capital is the same across countries. This paper shows that if a firm's elasticity of labor supply is finite, the return to capital overestimates capital's marginal product. A less developed country's marginal product of capital may far exceed a developed country's; a result that is consistent with the law of diminishing marginal returns to capital