On the explanation of the Lucas Paradox

- The Lucas Paradox is explained when country heterogeneity is controlled.
- Distribution of capital flows per capita is analysed.
- Income differentials are eliminated at the lower tail.
- International investments are quietly growth-driven towards the higher tail.

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.