Economic Geography and Structural Change

Abstract

As countries develop, the relative importance of agriculture declines and economic activity becomes spatially concentrated. We develop a model integrating structural change and regional disparities to jointly capture these phenomena. A key modeling innovation ensuring analytical tractability is the introduction of non-homothetic Cobb-Douglas preferences, which are characterized by constant unitary elasticity of substitution and non-constant income elasticity. As labor productivity increases over time, economic well-being rises, leading to a declining expenditure share on agricultural goods. Labor reallocates away from agriculture, and industry concentrates spatially, further increasing aggregate productivity: structural change and regional disparities are two mutually reinforcing outcomes and propagators of the growth process.