Structural Change in the Two-Sector Model with Endogenous Technological Progress

Abstract

We analyze the steady state and transitional dynamics of two-sector model with structural change and horizontal innovation. There are three main economic forces could drive structural change: technological progress in one sector, technological progress in the other sector, and capital deepening. When the exogenous parameters satisfy some conditions, the present model could generate aggregate balanced growth with non-balanced sectoral growth, in which case structural change would be an eternal phenomenon. However, while the exogenous parameters satisfy other conditions, the present model could generate aggregate balanced growth with balanced sectoral growth, but under the circumstances structural change could take place only during a (perhaps prolonged) transitional dynamic phase. These exogenous parameters include the capital intensity, the elasticity of intermediated input substitution, and the spillover effects in technology progress in the two sectors. Finally, we also show that the occurrence or the absence of structural change and endogenous non-balanced sectoral growth has nothing to dowith capital deepening in the present model, but depends on the sectoral differences in endogenous technological progress rate adjusted by the capital intensity and the elasticity of intermediated input in that sector.