Content introduction：

No. E2019005

April 14, 2019

 

 

Abstract:

 

An industry’s production function is often assumed to be exogenous and given in an economy. However, we observe tremendous heterogeneity in capital share of the same industry across countries and over time. This paper builds a multi-industry general equilibrium model to discuss structural change of industries and technology choices of each industry jointly in an economy. In the model, besides the quantity of inputs, firms also choose the production function as a way to combine the inputs, i.e. capital and labor in a CES production function. We find that an increase in capital endowment drives down the capital price, increases the capital intensity of every industry, and introduces structural change from labor intensive to capital intensive industries. Along the process, the technology choices depend crucially on the elasticity of substitution between capital and labor. Using the model, we compute the technology choices in manufacturing industries in US (1958-2011) and back out the key parameters of the model. Counterfactual analysis of the quantitative model shows that the technology upgrading driven by capital accumulation largely accelerate the structural change from labor intensive to capital intensive sectors.

 

 

Keywords:

 

Technology Choices, Production Function, General Equilibrium, Structural Change, Endowments

 

JEL Classification: O11, O14, O33, O41.

 

 

The series of New Structural Economics Working Papers aims to encourage academic scholars and students from all over the world to conduct academic research in the field of new structural economics. Excellent papers are selected irregularly and are offered academic suggestions and recommendation, but the published working papers are not intended to represent official communication from INSE.

The Present Paper was approved by the A0 NSE Growth Group.