DP10869 Endogenous Sector-Biased Technological Change and Industrial Policy
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.