Working Paper: CEPR ID: DP10869
Authors: Berthold Herrendorf; Akos Valentinyi
Abstract: We build a model of structural transformation with endogenous sector-biased technological change. We show that if the return to specialisation is larger in the goods sector than in the service sector, then the equilibrium has the following properties: aggregate growth is balanced; structural transformation takes place from goods to services; the service sector receives more innovation but the goods sector has more productivity growth. We show that compared to the efficient allocation the laissez-faire equilibrium has too much labor in the goods sector. This suggests that optimal industrial policy should aim to increase the pace of structural transformation.
Keywords: endogenous sector-biased technological change; horizontal innovation; industrial policy; structural transformation
JEL Codes: O11; O14; O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal industrial policy (O25) | increase the pace of structural transformation (O14) |
| return to specialization (goods sector) > return to specialization (service sector) (L89) | balanced aggregate growth (O40) |
| return to specialization (goods sector) > return to specialization (service sector) (L89) | structural transformation from goods to services (O14) |
| optimal industrial policy (O25) | enhance structural transformation (O49) |
| returns to specialization (externalities) (D62) | too little innovation in goods sector (O39) |
| too little innovation in goods sector (O39) | excessive labor allocation in goods sector (J29) |
| protecting goods sector through industrial policy (O25) | Pareto deterioration (D63) |
| laissez-faire equilibria (D50) | too little innovation in goods sector (O39) |