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Economic growth and sector dynamics

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  • Zeira, Joseph
  • Zoabi, Hosny

Abstract

This paper analyzes the endogenous determination of sectors in a growing economy. It assumes that there are traditional sectors and modern sectors and economic growth is driven by rising productivity of the modern sectors. It also assumes that individuals are heterogeneous, which leads to increasing marginal opportunity costs in creating new modern sectors. We show that under these main assumptions, economic growth first increases diversification to sectors and then reduces it. We also show that for the equilibrium to be stable and well-behaved, it is required that the modern and traditional sectors should be substitutes and not complements.

Suggested Citation

  • Zeira, Joseph & Zoabi, Hosny, 2015. "Economic growth and sector dynamics," European Economic Review, Elsevier, vol. 79(C), pages 1-15.
  • Handle: RePEc:eee:eecrev:v:79:y:2015:i:c:p:1-15
    DOI: 10.1016/j.euroecorev.2015.06.007
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    More about this item

    Keywords

    Traditional sectors; Modern sectors; Diversification; Economic growth; Substitutability;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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