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Two Perspectives on Preferences and Structural Transformation

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  • Berthold Herrendorf
  • Richard Rogerson
  • Ákos Valentinyi

Abstract

We ask what specification of preferences can account for the changes in the expenditure shares of broad sectors that are associated with the process of structural transformation in the U.S. since 1947. Following the tradition of the expenditure systems literature, we first calibrate utility function parameters using NIPA data on final consumption expenditure. We find that a Stone-Geary specification fits the data well. While useful, this exercise does not tell the researcher what utility function to use in a model that posits sectoral production functions in value added form. We therefore develop a method to calculate the value added components of consumption categories that are consistent with value added production functions, and use these data to calibrate a utility function over sectoral consumption value added. We find that a Leontief specification fits the data well. Interestingly, the two specifications display very different properties: for final consumption expenditure income effects are the dominant force behind changes in expenditure shares whereas for consumption value added relative price effects are dominant.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15416.

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Date of creation: Oct 2009
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Publication status: published as Berthold Herrendorf & Richard Rogerson & ?kos Valentinyi, 2013. "Two Perspectives on Preferences and Structural Transformation," American Economic Review, American Economic Association, vol. 103(7), pages 2752-89, December.
Handle: RePEc:nbr:nberwo:15416

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  1. Akos Valentinyi & Berthold Herrendorf, 2008. "Measuring Factor Income Shares at the Sectoral Level," IEHAS Discussion Papers 0803, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. Douglas Gollin & Stephen Parente & Richard Rogerson, 2002. "The Role of Agriculture in Development," American Economic Review, American Economic Association, vol. 92(2), pages 160-164, May.
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  6. Margarida Duarte & Diego Restuccia, 2010. "The Role of the Structural Transformation in Aggregate Productivity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 129-173, February.
  7. Herrendorf, Berthold & Valentinyi, Akos, 2007. "Measuring Factor Income Shares at the Sector Level - A Primer," CEPR Discussion Papers 6271, C.E.P.R. Discussion Papers.
  8. Foellmi, Reto & Zweimüller, Josef, 2008. "Structural change, Engel's consumption cycles and Kaldor's facts of economic growth," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1317-1328, October.
  9. Victor R. Fuchs, 1968. "Some Implications of the Growth of a Service Economy," NBER Chapters, in: The Service Economy, pages 183-200 National Bureau of Economic Research, Inc.
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  13. Messina, Julian, 2006. "The role of product market regulations in the process of structural change," European Economic Review, Elsevier, vol. 50(7), pages 1863-1890, October.
  14. Bah, El-hadj M., 2007. "Structural Transformation in Developed and Developing Countries," MPRA Paper 10655, University Library of Munich, Germany, revised 19 Sep 2008.
  15. Laitner, John, 2000. "Structural Change and Economic Growth," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(3), pages 545-61, July.
  16. Francisco J. Buera & Joseph P. Kaboski, 2009. "Can Traditional Theories of Structural Change Fit The Data?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 7(2-3), pages 469-477, 04-05.
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