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Does Risk Shape Economies? Income Volatility and Structural Change

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  • Cossu, Fenicia
  • Moro, Alessio
  • Mottola, Andrea

Abstract

Countries at similar levels of income can differ markedly in their sectoral composition. We show that income risk can account for part of these differences. In a multi-sector model with non-homothetic preferences, higher sectoral TFP volatility reduces the services share at a given level of GDP through a precautionary saving mechanism. Using U.S. time-series and household-level data, we find a negative and statistically significant relationship between several proxies for income risk and the services share. This relationship also holds for Latin American and Asian premature deindustrializers. We then build and calibrate a dynamic stochastic growth model of structural transformation and run a counterfactual in which we set early U.S. aggregate volatility to Great Moderation low levels. The counterfactual economy can explain about 17% of the services-share gap between the U.S. in 1879 and premature deindustrializers at comparable income levels.

Suggested Citation

  • Cossu, Fenicia & Moro, Alessio & Mottola, Andrea, 2025. "Does Risk Shape Economies? Income Volatility and Structural Change," CEPR Discussion Papers 20594, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:20594
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    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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