On the explanation of the Lucas Paradox

Abstract

This paper demonstrates that institutional quality provides a full explanation to the Lucas Paradox when country heterogeneity is controlled. Furthermore, in terms of the explanation of the paradox, quantile regression estimates reveal that foreign flows are driven by theoretical explanations at the lower tail, despite that they are significantly affected by growth prospects towards the higher tail. (C) 2015 Elsevier B.V. All rights reserved.