Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/77546 
Year of Publication: 
2013
Series/Report no.: 
Working Paper No. 123
Publisher: 
University of Zurich, Department of Economics, Zurich
Abstract: 
Sectoral data features (i) changing relative expenditures of different sectors, (ii) non-constancy in relative prices and (iii) long-run trends in relative TFP growth rates across sectors. We provide a tractable theory of industry directed technical change, which is able to reconcile these findings. In doing so, this paper emphasizes the importance of directed technical change, nonhomotheticity of preferences and structural change as a long-run phenomenon. Using the input-output tables of the U.S., our theory helps us to reconstruct how structural change in terms of final consumption affects the market size of industry value-added. Arguing that the structural change across broad categories of final consumption is exogenous from the perspective of an individual firm, this gives us an instrument for the industrial market size (at the valueadded level). We then empirically test for the market size effect of induced innovation. Our findings suggest that a 1 percent increase in an industry's market size (relative to GDP) leads to an increase in the TFP growth rate of about 0.3 percentage points over five years.
Subjects: 
directed technical change
structural change
non-homothetic preferences
input-output tables
market size effect
JEL: 
C67
O14
O31
O33
O41
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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