Standard economic theory suggests that capital should flow from rich countries to poor countries. However, capital has predominantly flowed to rich countries. The three essays in this dissertation attempt to explain this phenomenon. The first two essays suggest theoretical explanations for why capital has not flowed to the poor countries. The third essay empirically tests the theoretical explanations. The first essay examines the effects of increasing returns to scale on international lending and borrowing with moral hazard. Introducing increasing returns in a two-country general equilibrium model yields possible multiple equilibria and helps explain the possibility of capital flows from a poor to a rich country. I find that a borrowing country may need to borrow sufficient amounts internationally to reach a minimum investment threshold in order to invest domestically. The second essay examines how a poor country may invest in sectors with low productivity because of sovereign risk, and how collateral differences across sectors may exacerbate the problem. I model sovereign borrowing with a two-sector economy: one sector with increasing returns to scale (IRS) and one sector with diminishing returns to scale (DRS). Countries with incomes below a threshold will only invest in the DRS sector, and countries with incomes above a threshold will invest mostly in the IRS sector. The results help explain the existence of a bimodal world income distribution. The third essay empirically tests the explanations for why capital has not flowed from the rich to the poor countries, with a focus on institutions and initial capital. I find that institutional variables are a very important factor, but in contrast to other studies, I show that institutions do not account for the Lucas Paradox. Evidence of increasing returns still exists, even when controlling for institutions and other variables. In addition, I find that the determinants of capital flows may depend on whether a country is rich or poor.

The present study is an attempt to better understand change in international relations through utilization of the concept of international regimes. The following chapters focus on creation of the international lending regime and change that has occurred within this regime. The work begins by reviewing the regime literature, noting definitional and conceptual problems of the approach. The review concludes with examples of regime scholarship that are utilized through the rest of the study. Examination of international lending as a regime consists of three sections: first, a profile of the creation of the United States-led, post-war multilateral lending regime; second, the replacement of U.S. geo-political concerns with a market emphasis desired by international banks; third, the more recent redirection of lending as the utility of market forces is constrained by adjustments necessary to facilitate emergency debt restructuring.

In my dissertation, I explore the relationship between capital controls and the choice of the maturity structure of external debt in a general equilibrium setup, incorporating explicitly the role of international lenders. I look at specific types of capital controls which take the form of date-specific and maturity-specific reserve requirements on external borrowing. I consider two questions: How is the maturity structure of external debt determined in a world general equilibrium? What are the effects of date- and maturity-specific reserve requirements on the maturity structure of external debt? Can they prevent a bank run? I develop a simple Diamond-Dybvig-type model with three dates. In the low income countries, banks arise endogenously. There are two short-term bonds and one long-term bond offered by the domestic banks to international lenders. First I look at a simple model were international lending is modeled exogenously. I consider explicitly the maturity composition of capital inflows to a domestic economy. I show that the holdings of both short-term bonds are not differentiated according to date. Second, I consider international lending behavior explicitly. The world consists of two large open economies: one with high income and one with low income. The high income countries lend to low income countries. There exist multiple equilibria and some are characterized by relative price indeterminacy. Third, I discuss date-specific and maturity- specific reserve requirements. In my setup reserve requirements play the role of a tax and the role of providing liquidity for each bond at different dates. I show that they reduce the scope of indeterminacy. In some equilibria, I identify a case in which the reserve requirement rate on the long-term debt must be higher than that on the short-term debt for a tilt towards a longer maturity structure. Fourth, I introduce the possibility of an unexpected bank run. I show that some specific combination of date-and maturity-specific reserve requirements reduce the vulnerability to bank runs. With regard to the post-bank-run role of international lenders, I show that international lenders may still want to provide new short-term lending to the bank after the occurrence of a bank run.