DP10869 Endogenous Sector-Biased Technological Change and Industrial Policy

Author(s):	Berthold Herrendorf, Akos Valentinyi
Publication Date:	October 2015
Keyword(s):	endogenous sector-biased technological change, horizontal innovation, industrial policy, structural transformation
JEL(s):	O11, O14, O31, O33
Programme Areas:	Macroeconomics and Growth
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=10869

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.