NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Structural Change with Long-run Income and Price Effects

Diego A. Comin, Danial Lashkari, Martí Mestieri

NBER Working Paper No. 21595
Issued in September 2015, Revised in May 2018
NBER Program(s):Development of the American Economy, Development Economics, Economic Fluctuations and Growth, Productivity, Innovation, and Entrepreneurship

We present a new multi-sector growth model that features nonhomothetic, constant-elasticity- of-substitution preferences, and accommodates long-run demand and supply drivers of structural change for an arbitrary number of sectors. The model is consistent with the decline in agriculture, the hump-shaped evolution of manufacturing, and the rise of services over time. We estimate the demand system derived from the model using household-level data from the U.S. and India, as well as historical aggregate-level panel data for 39 countries during the postwar period. The estimated model parsimoniously accounts for the broad patterns of sectoral reallocation observed among rich, miracle and developing economies. Our estimates support the presence of strong nonhomotheticity across time, income levels, and countries. We find that income effects account for over 75% of the observed patterns of structural change.

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Document Object Identifier (DOI): 10.3386/w21595

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